David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
From the Global CPA Newsletter on September 24, 2014
Begin preparing for the CGMA exam with an online practice test
http://r.smartbrief.com/resp/geasBYbWhBCJtWdgCidKtxCicNnKyJ To
help CGMA designation candidates prepare for the upcoming CGMA exam, a
practice exam is now available. The practice exam illustrates the case study
exam's key features, demonstrates the questions' format and allows
candidates to gain familiarity of the exam's functionality. Visit CGMA.org
to learn more, anddownload both pre-seen materials and
exam answers.
From Two Former Presidents of the AAA
"Some Methodological Deficiencies in Empirical Research Articles in
Accounting."by Thomas R. Dyckman and Stephen A. Zeff , Accounting
Horizons: September 2014, Vol. 28, No. 3, pp. 695-712 ---
http://aaajournals.org/doi/full/10.2308/acch-50818 (not free)
This paper uses a sample of the regression and
behavioral papers published in The Accounting Review and the Journal of
Accounting Research from September 2012 through May 2013. We argue first
that the current research results reported in empirical regression papers
fail adequately to justify the time period adopted for the study. Second, we
maintain that the statistical analyses used in these papers as well as in
the behavioral papers have produced flawed results. We further maintain that
their tests of statistical significance are not appropriate and, more
importantly, that these studies do not—and cannot—properly address the
economic significance of the work. In other words, significance tests are
not tests of the economic meaningfulness of the results. We suggest ways to
avoid some but not all of these problems. We also argue that replication
studies, which have been essentially abandoned by accounting researchers,
can contribute to our search for truth, but few will be forthcoming unless
the academic reward system is modified.
This Dyckman and Zeff paper is indirectly related to the following technical
econometrics research: "The Econometrics of Temporal Aggregation - IV - Cointegration," by
David Giles, Econometrics Blog, September 13, 2014 ---
http://davegiles.blogspot.com/2014/09/the-econometrics-of-temporal.html
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
Jensen Comment
These purportedly are only undergraduates without graduate degrees such as
physicians, lawyers, MBAs, CPAs, etc.
It's not clear how the study dealt with five year programs in engineering,
accounting, etc. Most of the programs ranked in this article have popular
five-year programs. Presumably it excludes graduates who earned masters degrees.
The study also does not indicate how it deals with subsequent tracking into
higher management. For example, more CEOs and CFOs tend track more from
accounting, finance, marketing, management, and economics undergraduates and
graduates than from engineering and science. Were those people included in the
study even though they are no longer working in the discipline where they
graduated?
The study does not deal with unemployment prospects for students who do not
get advanced degrees. For example chemistry, physics, and earth science majors
have relatively poor prospects unless they obtain doctorates. Does the study
exclude physics undergraduates who also obtained physics doctoral degree?
Presumably those science graduates who did move on to graduate school have more
of an unemployment problem than nurses and lower-paid majors like elementary
school teachers.
Also there's a limitation of using medians that ignore standard deviations
and kurtosis. For example, students might be attracted to professions having the
most fewer but much higher salary prospects like finance and information
technology with a lower-end skewness bulge and prospects of enormous salaries.
TOPICS: Accounting
Standard Update, FASB, Going Concern
SUMMARY: The Financial
Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)
2014-15 on August 27, 2014, providing guidance on determining when and how
to disclose going-concern uncertainties in the financial statements. The new
standard requires management to perform interim and annual assessments of an
entity's ability to continue as a going concern within one year of the date
the financial statements are issued. An entity must provide certain
disclosures if "conditions or events raise substantial doubt about [the]
entity's ability to continue as a going concern." The ASU applies to all
entities and is effective for annual periods ending afterDecember
15, 2016, and interim periods thereafter, with early adoption
permitted.
CLASSROOM APPLICATION: This
article is appropriate for an update to the topic of going concern.
QUESTIONS:
1. (Introductory) What is FASB? What is its purpose? What is an
Accounting Standard Update?
2. (Advanced) What is "going concern"? Why is it important? Why
does GAAP require disclosure?
3. (Advanced) What does the new FASB Accounting Standard Update
require? What guidance does it offer?
4. (Advanced) What benefits does the new ASU offer to users of the
financial statements? How is the information relevant. Please explain how
this information could be used?
5. (Advanced) What are the details of the ASU regarding disclosure
thresholds, time horizon, and disclosure content?
Reviewed By: Linda Christiansen, Indiana University Southeast
The Financial Accounting Standards Board (FASB)
issued Accounting Standard Update (ASU) 2014-15¹ on August 27, 2014,
providing guidance on determining when and how to disclose going-concern
uncertainties in the financial statements. The new standard requires
management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date the financial
statements are issued.² An entity must provide certain disclosures if
“conditions or events raise substantial doubt about [the] entity’s ability
to continue as a going concern.” The ASU applies to all entities and is
effective for annual periods ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted.
Following is background on the ASU and a summary of
its key provisions, excerpted from Deloitte’s Heads
Up newsletter. The newsletter contains
decision flowcharts adapted from the ASU that summarize going-concern
disclosure considerations (see Appendix A) and a comparison of the ASU to
current PCAOB auditing literature (see Appendix B).
Background
Under U.S. GAAP, an entity’s financial reports
reflect its assumption that it will continue as a going concern until
liquidation is imminent.³ However, before liquidation is deemed imminent, an
entity may have uncertainties about its ability to continue as a going
concern. Because there are no specific requirements under current U.S. GAAP
related to disclosing such uncertainties, auditors have used applicable
auditing standards⁴ to assess the nature, timing, and extent of an entity’s
disclosures, which has resulted in diversity in practice. The ASU is
intended to alleviate that diversity.
The ASU extends the responsibility for performing
the going-concern assessment to management and contains guidance on (1) how
to perform a going-concern assessment and (2) when going-concern disclosures
would be required under U.S. GAAP. The FASB believes that requiring
management to perform the assessment will enhance the timeliness, clarity,
and consistency of related disclosures and improve convergence with IFRSs
(which emphasize management’s responsibility for performing the
going-concern assessment). However, the time horizon for the assessment
(look-forward period) and the disclosure thresholds under U.S. GAAP and
IFRSs will continue to differ.
Editor’s
Note: As a result of the ASU’s extension of the going-concern
assessment to management, entities may need to implement and document their
processes and controls, which would require the use of judgment. The costs
of complying with the ASU are likely to be greatest for entities that are
not financially strong since such entities would need to perform a more
robust evaluation.
Key Provisions of the ASU
Disclosure Thresholds
An entity would be required to disclose information
about its potential inability to continue as a going concern when
“substantial doubt” about its ability to continue as a going concern exists,
which the ASU defines as follows:
“Substantial doubt about an entity’s ability to
continue as a going concern exists when conditions and events, considered in
the aggregate, indicate that it is probable that the entity will be unable
to meet its obligations as they become due within one year after the date
that the financial statements are issued . . . . The term probable is
used consistently with its use in Topic 450 on contingencies.”
In applying this disclosure threshold, entities
would be required to evaluate “relevant conditions and events that are known
and reasonably knowable at the date that the financial statements are
issued.” Reasonably knowable conditions or events are those that can be
identified without undue cost and effort.
The ASU provides examples of events that suggest
that an entity may be unable to meet its obligations. These examples, which
are consistent with those in auditing literature,⁵ include the following:
1. “Negative financial trends, for example,
recurring operating losses, working capital deficiencies, negative cash
flows from operating activities, and other adverse key financial ratios.
2. Other indications of possible financial
difficulties, for example, default on loans or similar agreements,
arrearages in dividends, denial of usual trade credit from suppliers, a need
to restructure debt to avoid default, noncompliance with statutory capital
requirements, and a need to seek new sources or methods of financing or to
dispose of substantial assets.
3. Internal matters, for example, work stoppages or
other labor difficulties, substantial dependence on the success of a
particular project, uneconomic long-term commitments, and a need to
significantly revise operations.
4. External matters, for example, legal
proceedings, legislation, or similar matters that might jeopardize the
entity’s ability to operate; loss of a key franchise, license, or patent;
loss of a principal customer or supplier; and an uninsured or underinsured
catastrophe such as a hurricane, tornado, earthquake, or flood.”
Editor’s
Note: Under current auditing standards, an auditor is required
to evaluate the adequacy of going-concern disclosures after concluding that
there is substantial doubt about the entity’s ability to
continue as a going concern for a reasonable period. The ASU uses a
“probable” threshold to define substantial doubt (see the definition above),
whereas the auditing literature does not explicitly define substantial doubt
and instead provides qualitative factors for entities to consider. The ASU’s
basis for conclusions notes that some auditors and stakeholders view the
existing substantial-doubt threshold as a lower threshold than the new
“probable” threshold (with one academic study noting that a threshold of
between 50 and 70 percent is used for substantial doubt, and certain comment
letter responses indicating that a threshold of greater than 70 percent is
used for probable). As a result, there could be fewer going-concern
disclosures under the ASU than there are under current guidance.
Time Horizon
In each reporting period (including interim
periods), an entity would be required to assess its ability to meet its
obligations as they become due for one year after the date the financial
statements are issued. In the following illustration, adapted from a handout for
the FASB’s May 7, 2014, meeting, the look-forward period is illustrated and
compared to current auditing standards:
Continued in article
From the CPA Newsletter on September 16, 2014
Coalition asks House to hold off on XBRL measure ---
http://r.smartbrief.com/resp/gdbyBYbWhBCJnXpECidKtxCicNekGa?format=standard
The Data Transparency Coalition is asking the House of Representatives to
delay a vote on a measure that would soften Securities and Exchange
Commission requirements that companies file financial statements using
eXtensible Business Reporting Language. The group is asking that the House
reconsider some provisions of the Promoting Job Creation and Reducing Small
Business Burdens Act because the coalition says these provisions would hurt
the larger goals of transparency and accountability in financial reporting.
Accounting Today
(9/15)
Regulatory capture — when regulators come to act
mainly in the interest of the industries they regulate — is a phenomenon
that economists, political scientists, and legal scholars have been
writing about for decades.
Bank regulators in particular have been
depicted as
captives for years,
and have even taken to
describing themselves as such.
Actually witnessing capture in the wild is
different, though, and
the new This American Life episode with
secret recordings of bank examiners at the Federal Reserve Bank of New York
going about their jobs is going to focus a lot more attention on the
phenomenon. It’s really well done, and you should
listen to it, read
the transcript, and/or
read the story by ProPublica reporter Jake
Bernstein.
Still, there is some context that’s inevitably
missing, and as a former banking-regulation reporter for the American Banker,
I feel called to fill some of it in. Much of it has to
do with the structure of bank regulation in the U.S., which actually seems
designed to encourage capture. But to start, there are a couple of
revelations about Goldman Sachs in the story that are treated as smoking
guns. One seems to have fired a blank, while the other may be even more
explosive than it’s made out to be.
In the first, Carmen Segarra, the former Fed bank
examiner who made the tapes, tells of a Goldman Sachs executive saying in a
meeting that “once clients were wealthy enough, certain consumer laws didn’t
apply to them.” Far from being a shocking admission, this is actually a
pretty fair summary of American securities law. According to the Securities
and Exchange Commission’s “accredited
investor” guidelines, an individual with a net
worth of more than $1 million or an income of more than $200,000 is exempt
from many of the investor-protection rules that apply to people with less
money. That’s why rich people can invest in hedge funds while, for the most
part, regular folks can’t. Maybe there were some incriminating details
behind the Goldman executive’s statement that alarmed Segarra and were left
out of the story, but on the face of it there’s nothing to see here.
The other smoking gun is that Segarra pushed for a
tough Fed line on Goldman’s lack of a substantive conflict of interest
policy, and was rebuffed by her boss. This is a big deal, and for
much more than the legal/compliance reasons discussed in the piece. That’s
because, for the past two decades or so, not having a substantive conflict
of interest policy has been Goldman’s business model. Representing both
sides in mergers, betting alongside and against clients, and exploiting its
informational edge wherever possible
is simply how the firm makes its money. Forcing it
to sharply reduce these conflicts would be potentially devastating.
Maybe, as a matter of policy, the United States
government should ban such behavior. But asking bank examiners at
the New York Fed to take an action on their own that might torpedo a leading
bank’s profits is an awfully tall order. The regulators at the Fed and their
counterparts at the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation correctly see their main job as
ensuring the safety and soundness of the banking system. Over the decades,
consumer protections and other rules have been added to their purview, but
safety and soundness have remained paramount. Profitable banks are generally
safer and sounder than unprofitable ones. So bank regulators are
understandably wary of doing anything that might cut into profits.
The point here is that if bank regulators are
captives who identify with the interests of the banks they regulate, it is
partly by design. This is especially true of the Federal Reserve System,
which was created by Congress in 1913 more as a friend to and creature of
the banks than as a watchdog. Two-thirds of
the board that governs the New York Fed is chosen
by local bankers. And while
amendments to the Federal Reserve Act in 1933
shifted the balance of power in the Federal Reserve System from the regional
Federal Reserve Banks (and the New York Fed in particular) to the political
appointees on the Board of Governors in Washington, bank regulation
continues to reside at the regional banks. Which means that the bank
regulators’ bosses report to a board chosen by … the banks.
Then there’s the fact that Goldman Sachs is a
relative newcomer to Federal Reserve supervision — it and rival Morgan
Stanley only agreed
to become bank holding companies, giving them
access to New York Fed loans, at the height of the financial crisis in 2008.
While it’s a little hard to imagine Goldman choosing now to rejoin the ranks
of mere securities firms, and even harder to see how it could leap to a
different banking regulator, it is possible that some Fed examiners
are afraid of scaring it away.
All this is meant not to excuse the extreme
timidity apparent in the Fed tapes, but to explain why it’s been so hard for
the New York Fed to adopt the more aggressive, questioning approach urged by
Columbia Business School Professor David Beim in a
formerly confidential internal Fed report that
This American Life and ProPublica give a lot of play to. Bank
regulation springs from much different roots than, say, environmental
regulation.
So what is to be done? A lot of the
classic regulatory capture literature tends toward
the conclusion that we should just give up — shut down the regulators and
allow competitive forces to work their magic. That means letting businesses
fail. But with banks more than other businesses, failures tend to be
contagious. It was to counteract this risk of systemic failure that Congress
created the Fed and other bank regulators in the first place, and even if
you think that was a big mistake, they’re really not going away.
Reports of corporate fraud reach 9-year high ---
http://r.smartbrief.com/resp/gerJBYbWhBCJxrygCidKtxCicNeOnE?format=standard
The percentage of fraud-related incidents reported by whistleblowers on
telephone and Web-based hotlines rose to 26.31% last year from 23.6% in
2012, according to compliance technology provider The Network's 2014
Corporate Governance and Compliance Hotline Report. The figure represents a
nine-year high since the first Corporate Fraud Index was released. The
report also noted that retaliation against people reporting fraud rose,
although slightly, to 2.2% last year from 2% the previous year.Compliance
Week/The Filing Cabinet blog(9/26)
Judith Auclair was sentenced to 15 months in prison
after it was discovered she falsely claimed £17,254 in tax refunds.
In addition, Auclair also stole a further £4,927 of
tax and NIC contributions, which had been wrongly deducted from other
employees’ wages.
Auclair was able to do this because she regularly
submitted PAYE tax returns on her employer’s behalf, and added false
employee details to the company’s payroll and claimed they were owed tax
refunds. These refunds were paid into her personal bank account.
John Cooper, HMRC’s assistant director of criminal
investigation, said, “Judith Auclair abused her position of trust as a
bookkeeper by stealing from her employers and UK taxpayers and continued to
do so even after she was arrested.
“Committing tax fraud is a serious criminal offence
and yesterday’s result shows that HMRC will take action against anyone doing
so.”
Selected Online Masters of Accounting and Masters of Taxation Programs ---
http://www.trinity.edu/rjensen/CrossBorder.htm#MastersOfAccounting Time between enrollment and graduation depends a great deal on meeting
prerequisite requirements in accountancy, and business core (including economics
and ethics). I'm biased in recommending such degrees from only AACSB-accredited
business programs, although not necessarily AACSB-accredited accounting
programs. Some of the most prestigious AACSB-accredited universities do not have
the added accountancy specialized accreditation.
Jensen Comment
My own listing of the Top 10 would be much closer to the US News rankings. But I
would replace one of the above with Cornell University largely because Cornell
is in the Ivy League. Being in the Ivy League does not make its undergraduate
program better, but being in the Ivy League means that students accepted into
the university in general are in a league of their own.
Note that to sit for the Uniform CPA Examination, accounting graduates must
have 150 credits. This means they must take a fifth year, and most accounting
graduates do so by getting a masters degree in accountancy or taxation rather
than an MBA degree. Most states have require accounting courses to sit for the
CPA examination that are not available in MBA programs. MBA programs that have
accounting concentrations require that students have a set of undergraduate
accounting courses.
I should also note that when I scan the listings of employees who have been
promoted to partnerships in the largest accounting firms (often much less than
10% of the initial hires by the firms) the alma maters of those new
partners are more often than not graduated from much lower-ranked among
accounting education programs. The reason is that exceptional accounting
graduates can be found in any accounting program, and often the top partner
prospects are highly motivated and talented students from lesser-known
universities who can compete with graduates in the top universities.
What are the top-ranked accounting graduate programs?
It all depends on what programs and what criteria are used for the rankings
Jensen Comment
In some ways the above rankings of MBA programs with accounting specialties are
misleading. There are some top-ranked MBA programs above that should probably be
avoided for graduates seeking careers as CPAs in auditing and taxation. All the
programs above have accounting Ph.D. programs, but the above top rankings for
MBA in accounting specialties are not necessarily the top accounting doctoral
programs.
Students seeking to pass the CPA examination and aiming for careers in
auditing and taxation should probably seek out masters of accounting or masters
of taxation programs rather than MBA programs. Brigham Young University
(Marriott) has a top-ranked masters of accounting program but no accounting
doctoral program. The University of Texas, the University of Michigan, the
University of Southern California, the University of North Carolina, and the
University of Illinois have top masters of accounting programs, MBA programs,
and Ph.D. programs.
Stanford University and the University of Chicago have prestigious MBA
programs but do not have masters of accounting programs. Students seeking to
pass the CPA examination and searching for careers in auditing and taxation
would not normally choose Stanford or Chicago.
Top Masters of Accounting Programs
Best Master’s in Accounting Schools According to
Professors
Here are the top ranked master’s in accounting programs in 2013 according
to the Public Accounting Report:
1. University of Texas
2. Brigham Young University
3. University of Illinois
4. University of Notre Dame
5. University of Mississippi
6. University of Southern California
7. University of Michigan
8. Texas A&M University
9. Indiana University
10. University of North Carolina
The
Public Accounting Report ranks accounting programs annually based on a
survey of accounting professors at over 200 colleges and universities.
Accounting Schools with the Highest 2013 First-Time CPA
Pass Rate
1. Brigham Young University
2. University Georgia
3. University of Wisconsin Madison
4. University of Michigan Ann Arbor
5. University of Notre Dame
6. Texas A&M University
7. University of Virginia
8. University of Texas Austin
9. Lehigh University
10. University of North Carolina Chapel Hill
These rankings are for large schools with at least 60 candidates for the
CPA exam. For all candidates in the United States, the first-time pass rate
was 54.6% in 2013 according to Nasba.org. You can find more information and
specific statistics on the
2013 NASBA Uniform CPA Examination Candidate Performance report.
If we were to just rank the
accounting doctoral programs in terms of research performance the
rankings might be quite different from the rankings shown above for MBA
specialty and Master of Accounting Programs ---
http://www.byuaccounting.net/rankings/univrank/rankings.php
"Accounting Doctoral Programs: A Multidimensional Description,"
by Amelia A. Baldwin, Carol E. Brown and BradS. Trinkle.
http://www.academia.edu/532495/Accounting_Doctoral_Programs_A_Multidimensional_Description Advances in Accounting Education: Teaching and Curriculum Innovations,
Volume 11, 101–128Copyright r 2010 by Emerald Group Publishing Limited
ISSN: 1085-4622/doi:10.1108/S1085-4622(2010)000001100
Accounting doctoral programs have been ranked in
the past based on publishing productivity and graduate placement. This
chapter provides descriptions of accounting doctoral programs on a wider
range of characteristics. These results may be particularly useful to
doctoral applicants as well as to doctoral program directors, accreditation
bodies, and search committees looking to differentiate or benchmark
programs. They also provide insight into the current shortage of accounting
doctoral graduates and future areas of research. Doctoral programs can be
differentiated on more variables than just research productivity and initial
placement. Doctoral programs vary widely with respect to the following
characteristics: the rate at which doctorate sare conferred on women and
minorities, the placement of graduates according to Carnegie classification,
AACSB accreditation, the highest degree awarded by employing institution
(bachelors, masters, doctorate),
Continued in article
Table 1. Accounting Doctoral Graduates by Program,
1987–2006(Size; 3,213 Graduates).
http://www.academia.edu/532495/Accounting_Doctoral_Programs_A_Multidimensional_Description
Note that I corrected the ranking for North Texas State from the original
table
The average of 161 per year has been declining. In 2013 there were only 136
new accounting doctorates in the USA.
Rank
Program
#
Rank
Program
#
Rank
Program
#
Rank
Program
#
01
Texas A&M
87
25
Arkansas
46
49
Columbia
31
73
MASS
17
02
Texas
78
26
Florida State
45
50
Drexel
31
74
Syracuse
16
03
Illinois
72
27
Indiana
45
51
Northwester
31
74
Wash St. Louis
15
04
Mississippi
70
28
Tennessee
44
52
Cornell
30
75
Central Florida
14
05
Va. Tech
70
29
Texas Tech
44
53
Purdue
29
76
Cincinnati
14
06
Kentucky
69
30
Georgia St.
43
54
Minnesota
28
77
Cleveland St
14
07
Wisconsin
69
31
Colorado
42
55
Oklahoma
28
78
MIT
13
08
North Texas
65
32
NYU
42
56
Penn
28
79
Fla Atlantic
12
09
Arizona
64
33
Oklahoma St
42
57
Rochester
28
80
UCLA
12
10
Georgia
64
34
Rutgers
42
58
So. Illinois
28
81
Union NY
10
11
Penn State
63
35
Alabama
41
59
Oregon
27
82
Texas Dallas
09
12
Nebraska
61
36
Va. Common
40
60
Texas Arling.
27
83
Tulane
08
13
Arizona St.
60
37
Memphis
38
61
Utah
27
84
Duke
6
14
Houston
60
38
Stanford
37
62
Baruch
25
85
Jackson St.
6
15
Michigan St.
60
39
Chicago
36
63
Connecticut
24
86
Fla. Internat.
4
16
Washington U
55
40
Missouri
36
64
Carnegie M.
23
87
SUNY Bing.
4
17
So. Carolina
54
41
No. Carolina
36
65
Geo. Wash
23
88
Yale
4
18
Michigan
52
42
So. Calif.
36
66
Wash. State
23
89
Ga. Tech
3
19
La. Tech
51
43
UC Berkeley
35
67
Kansas
22
90
Rice
3
20
Ohio State U
50
44
Boston Univ
35
68
SUNY Buffalo
21
91
Tx. San Anton.
3
21
Kent State
49
45
Maryland
35
69
St. Louis
21
93
Miami
2
22
LSU
49
46
Pittsburg
35
70
CWRU
19
94
Cal. Irvine
1
23
Florida
47
47
Iowa
34
71
Harvard
19
95
Hawaii
1
24
Mississippi St
47
48
Temple
34
72
South Fla.
19
96
Vanderbilt
1
Jensen Comment
For years prior to 1987 and years subsequent to 2006 you can see the data by
years in a sequence of the Accounting Faculty Directories by James
Hasselback. For example, for years 1995-current go to
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
For years prior to 1995 you have to go to earlier editions of Jim's directories.
There are some minor discrepancies. For example, the above table shows 3
graduates for Rice after 1987 whereas Jim Hasselback shows no graduates at Rice
after 1995. I did not check for all the discrepancies between the two data
sources. Rice no longer has a doctoral program in accountancy. There are several
newer (small) programs such as the one at the University of Texas at San
Antonio.
Nearly all of the long-time programs declined dramatically in output from their
pre-1995 years, especially the University of Illinois, the University of
Washington. the University of Georgia, the University of Arkansas, Indiana
University, and Michigan State University. The Texas state universities kept a
more steady average although output varies year-to-year.
In past few years since 2010 Arizona, Arizona State, Rutgers, Penn State, Texas,
Texas A&M, Stanford, and Mississippi maintained an average of three or more per
year. Chicago in recent years has quite a few in the program but has an average
of less than two graduates per year. This suggests to me that there might be
more ABDs dammed up at the University of Chicago than in most other doctoral
programs. UT Dallas and Illinois are also suspect in this regard ---
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
The Baldwin, Brown, and Trinkle paper goes on to discuss trends over time in
the leading programs and much much more. I did not quote data from their paper
that was not previously provided by Jim Hasselback at
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
A few of the many important revelations in the BBT study that might be noted
for 1987-2006:
The proportion of female accounting doctorates was 38% of the 3,213
graduates over 20 years.
The proportion of minority accounting doctorates was 4.6% of the
3,213 graduates over 20 years.
Foreign placement of accounting doctoral graduates whose location is
known is about 14% (including those going back to Canada)
Non-academic placement of accounting doctoral graduates whose
employment is know is about 3%. There are very few career advantages of
having an accounting Ph. D. in industry. This is not the case in most
other academic disciplines.
The growing concern for the under-representation of
women in science and engineering has prompted an interest in the mechanisms
driving the share of women in these fields, and in the effect that the
gender diversity of the faculty has on the share of female students.
Interestingly, some universities are more successful than others in
recruiting and retaining women, and in particular female graduate students.
Why is this the case? This paper explores the uneven distribution of female
faculty and graduate students across ten of the top U.S. PhD programs in
economics. We find that the share of female faculty is correlated with the
share of female graduate students and show that this correlation is causal.
We instrument for the share of female faculty by using the number of male
faculty leaving the department as well as the simulated number of leavings.
We find that a higher share of female faculty has a positive effect on the
share of female graduate students graduating 6 years later.
Women are under represented in science and
engineering. In 2010, Men outnumbered women in nearly every science and
engineering field in college, and in some fields, women earned only 20
percent of bachelor’s degrees, with representation declining further at the
graduate level (Hill et al., 2010). In
economics, women constituted 33 percent of the graduating PhD students, and
only 20 percent of faculty at PhD granting institutions
(Fraumeni, 2011).
Women in economics have been shown to have different
career paths than men and to be promoted less (Kahn, 1993; Dynan and Rouse,
1997; McDowell et al., 1999; Ginther and Kahn, 2004). Focusing on the
progression of women through the academic ladder, most research has failed
to fully account for the effect that successful women in the field have had
on the entrance and success of other women. More specifically, the gross
effect that women faculty have on the share of female students have not been
fully explored. In this study we address this gap in the literature and
focus on the causal relationship between the share of female faculty in top
economics departments and the share of graduating female PhD students.
Continued in article
Jensen Comment
Women seem to be making greater strides in Ph.D. achievements in economics that
in many other science fields. It would seem that they could make greater strides
in fields like computer science where males dominate to a much higher degree.
In economics at the undergraduate and
masters levels in North America there are significantly more male graduates than
female graduates. Having more female teachers tends to increase the number of
undergraduate majors according to the above study.
In accounting at the undergraduate and
masters levels in North America there are significantly
more women graduates than men, and the large CPA firms hire more women
than men. There is a possible glass ceiling, however, in terms of newly-hired
CPA-firm women who eventually become partners. That is a very complicated story
for another time other than to note that the overwhelming majority of
newly-hired males and females in large CPA firms willingly leave those firms
after gaining experience and very extensive training.
Many of those departures go to clients of CPA firms where the work tends to
have less travel and less night/weekend duties as well as less stress. In my
opinion most accounting graduates who go to work for CPA firms did not ever
intend to stay with those CPA firms after gaining experience and training. This
accounts for much of the turnover, especially in large CPA firms.
Turnover has an advantage in that it creates more
entry-level jobs for new graduates seeking experience and extensive training.
I begin my remarks by echoing others and
commending the work of the team that has been working on this rule,
including Rolaine Bancroft, Hughes Bates, Michelle Stasny, Kayla Florio,
Heather Mackintosh, Silvia Pilkerton, Robert Errett, Max Rumyantsev, and
Kathy Hsu.
Heather and Sylvia have been working on
the data tagging and preparing EDGAR to accept this new data. This is no
small endeavor.
I want to give a special thank you to
Paula Dubberly, who retired last year from the SEC and is in the audience
today. She has been a champion for investors through her leadership on
asset-backed securities regulation from the development of the initial Reg
AB proposal through the rules that are being considered today.
This rule is an important step
forward in completing the mandated Dodd-Frank Act rulemakings.[1]
The financial crisis revealed investors’ inability to actually assess pools
of loans that had been sliced and diced, sometimes multiple times, by being
securitized, re-securitized, or combined in a dizzying array of complex
financial instruments. The securitization market was at the center of the
financial crisis. While securitization structures provided liquidity to
nearly every sector in the U.S. economy, they also exposed investors to
significant and non-transparent risks due to poor lending practices and poor
disclosure practices.
As we now know, offering documents
failed to provide timely and complete information for investors to assess
the underlying risks of the pool of assets.[2]
Without sufficient and accurate loan level details, analysts and investors
could not gauge the quality of the loans – and without an ability to
distinguish the good from the bad, the secondary market collapsed.
Congress responded and required the
Commission to promulgate rules to address a number of weaknesses in the
securitization process.[3]
Six years after the financial crisis, the
securitization markets continue to recover. While certain asset classes
have rebounded, others continue to struggle.
The rule the Commission issues today
partially addresses the Congressional mandate. In effect, today’s rules
provide investors with better information on what is inside the
securitization package. The rules today do for investors what food and drug
labeling does for consumers – provide a list of ingredients.
This rule also addresses certain critical
flaws that became apparent in the securitization process, including a dearth
of quality information and insufficient time to make informed assessments of
the underlying investments. This rule is an important step toward providing
investors with tools and data to better understand the underlying risks and
appropriately price the securities.
There are several important and laudable
aspects of today’s rule that merit specific mentioning.
First, the rule requires the
underlying loan information to be standardized and available in a tagged XML
format to ensure maximum utility in analysis.[4]
As noted in the Commission’s 2010 Proxy Plumbing Release: “If issuers
provided reportable items in interactive data format, shareholders may be
able to more easily obtain information about issuers, compare information
across different issuers, and observe how issuer-specific information
changes over time as the same issuer continues to file in an interactive
format.”[5]
The same is true for underlying loan information. Investors can unlock the
value and efficiency that standardized, machine readable data allows.
Today’s rule also improves disclosures
regarding the initial offering of securities and significantly, for the
first time, requires periodic updating regarding the loans as they perform
over time. This information will provide a more nuanced and evolving
picture of the underlying assets in a portfolio to investors.
The rule also requires that the principal
executive officer of the ABS issuer certify that the information in the
prospectus or report is accurate. These kinds of certifications provide a
key control to help ensure more oversight and accountability.
As for the privacy concerns that prompted
a re-proposal, the staff has worked hard to balance investor needs for loan
level data with concerns that the data could lead to identification of
individual borrowers. I believe the rule achieves a workable balance
between these two competing needs, while still providing invaluable public
disclosure.
Finally, I believe that the new
disclosure rule will provide investors with the necessary tools to see what
is “under the hood” on auto loan securitizations. In its latest report on
consumer debt and credit, the Federal Reserve Bank of New York noted a
recent spike in subprime auto lending. As the report shows, although
consumer auto debt balances have risen across the board, the real growth has
been in riskier loans.[6]
The disclosure and reporting changes that the Commission is adopting today
will help investors see the quality of the loans in a portfolio and the
performance of those loans over time.
While today’s rules are an important step
forward, more work needs to be done regarding conflicts of interest. We
now know that many firms who were structuring securitizations before the
financial crisis were also betting against those same securitizations.
In April 2010, the Commission
charged the U.S broker-dealer of a large financial services firm for its
role in failing to disclose that it allowed a client to select assets for an
investment portfolio while betting that the portfolio would ultimately lose
its value. Investors in the portfolio lost more than $1 billion.[7]
In October 2011, the Commission sued the
U.S broker-dealer of a large financial services firm for among other things,
selling investment products tied to the housing market and then, for their
own trading, betting that those assets would lose money. In effect, the
firm bet against the very investors it had solicited. An experienced
collateral manager commented internally that a particular portfolio was
“horrible.” While investors lost virtually all of their investments in the
portfolio, the firm pocketed over $160 million from bets it made against the
securitization it created.[8]
The Dodd-Frank Act directed the
Commission to adopt rules prohibiting placement agents, underwriters, and
sponsors from engaging in a material conflict of interest for one year
following the closing of a securitization transaction. Those rules were
required to be issued by April 2011.[9]
The Commission initially proposed these rules in September 2011, and still
has not completed them.[10]
We need to complete these rules as soon as possible, hopefully, by the end
of this year. These rules will provide investors with additional confidence
that they are not being hoodwinked by those packaging and selling those
financial instruments.
Unfortunately, the Commission has put on
hold its work to provide investors with a software engine to aid in the
calculation of waterfall models. Although the final rule provides for a
preliminary prospectus at least three business days before the first sale,
this is reduced from the proposal, which provided for a five-day period.
With only three days to conduct due diligence and make an investment
determination, such a software engine could be an important and much needed
tool for investors to use in analyzing the flow of funds. Such waterfall
models can help investors assess the cash flows from the loan level data.
We should return to this important initiative to provide investors with the
mathematical logic that forms the basis for the narrative disclosure within
the prospectus.
The rule today impacts some significant
sectors of the securitization market, however, the Commission should
continue to work in making improvements that will provide investors with the
disclosures they need regarding other asset classes, such as student loans,
equipment loans and leases, and others as appropriate.
Finally, it is vitally important that the
Commission continue to work with our fellow regulators to establish
important provisions for risk retention, also required by the Dodd-Frank
Act.
In conclusion, I appreciate the staff’s
hard work both with me and my staff over these past several months. But
much work remains to be done. I am committed to working with the staff and
my fellow Commissioners to continue to move forward with Dodd-Frank
rulemakings and specifically rulemakings to improve the strength and
resiliency of securitization markets.
A stable securitization market efficiently
brings investors and issuers together. Thus far, the return of capital to
securitization markets has been disappointing, and I am hopeful that this
rule and others that will follow will provide incentives for both issuers
and investors to return with confidence to this once vibrant marketplace.
The new tools and protections provided in
today’s rule should help restore trust in a market that was at the heart of
the worst financial crisis since the Great Depression. But removing this
black cloud is going to require continuing focus and effort from all of us.
Thank you. I
[1] The
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.
No. 111-203, 124 Stat. 1376 (July 21, 2010).
[2]See
Sheila Bair, Bull by The Horns: Fighting to Save Main Street From
Wall Street and Wall Street From Itself at 52 (2012) (investors
in asset-backed securities lacked detailed loan level information
and adequate time to analyze the information before making an
investment decision).
[3] The
Dodd-Frank Wall Street Reform and Consumer Protection Act imposed
new requirements on the ABS process and required the Commission to
promulgate rules in a number of areas. Section 621 prohibits an
underwriter, placement agent, initial purchaser, sponsor, or any
affiliate or subsidiary of any such entity, of an asset-backed
security from engaging in any transaction that would involve or
result in any material conflict of interest with respect to any
investor in a transaction arising out of such activity for a period
of one year after the date of the first closing of the sale of the
asset-backed security. Section 941 requires the Commission, the
Federal banking agencies, and, with respect residential mortgages,
the Secretary of Housing and Urban Development and the Federal
Housing Finance Agency to prescribe rules to require that a
securitizer retain an economic interest in a material portion of the
credit risk for any asset that it transfers, sells, or conveys to a
third party. The chairperson of the Financial Stability Oversight
Council is tasked with coordinating this regulatory effort. Section
942 contains disclosure and Exchange Act reporting requirements for
ABS issuers. Section 943 requires the Commission to prescribe
regulations on the use of representations and warranties in the ABS
market. Section 945 requires the Commission to issue rules
requiring an asset-backed issuer in a Securities Act registered
transaction to perform a review of the assets underlying the ABS,
and disclose the nature of such review. Seealso
H.R. Rep. No. 4173 (2010) (Dodd-Frank Conference Report)
[9] Dodd-Frank
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, §
621, 124 Stat. 1376, 1632 (2010).
[10]See
SEC Release No. 34-65355, Prohibition against Conflicts of
Interest in Certain Securitizations, September 19, 2011; SEC
Release No. 34-65545, October 12, 2011 (extending the comment period
from December 19, 2011 to January 13, 2012); and SEC Release No.
34-66058, October 12, 2011 (extending the comment period end date
from January 13, 2012 to February 13, 2012).
Accounting firms PricewaterhouseCoopers and Crowe
Horwath must face a lawsuit accusing them of professional malpractice and
breach of contract for not catching a fraud that led to the 2009 collapse of
Colonial Bank, a federal judge has ruled.
Filed in 2011 by the bank's parent Colonial
BancGroup Inc and its trustee, the lawsuit accused the accounting firms of
making "reckless and grossly inaccurate" reports to the bank's board,
allowing Colonial to conceal a seven-year fraud that drained it of $1.8
billion.
In an opinion on Tuesday, U.S. District Judge Keith
Watkins rejected the auditors' motion to dismiss the complaints, saying the
bank made "plausible" claims that PwC and Crowe breached their contract with
Colonial.
PwC was the public auditor for Montgomery,
Alabama-based Colonial before its collapse, while Crowe provided internal
audit services.
Caroline Nolan, a spokeswoman for PwC, said it
audited Colonial "in full accordance with professional standards" and is
confident it will prevail on the merits of the case, which will now go
forward in district court.
Jan Lippman, a spokeswoman for Crowe, said the
audit firm was hired to help Colonial with internal services but did not
serve as the bank's internal auditor. She said the claims are without merit.
Rufus Dorsey, a lawyer for Colonial, said he was
pleased with the decision.
The fraud, one of the biggest stemming from the
last decade's mortgage crisis, went undetected until a raid by federal
authorities on Aug. 3, 2009. One of the largest U.S. regional banks,
Colonial was seized by regulators and filed for bankruptcy protection later
that month.
PwC and Crowe are facing a similar lawsuit by the
Federal Deposit Insurance Corporation, receiver for the bank. The 2012 FDIC
lawsuit said that PwC and Crowe missed "huge holes" in Colonial's balance
sheet caused by the diversion of money to now bankrupt Taylor Bean &
Whitaker Mortgage Corp.
Lee Farkas, former chairman of Taylor Bean, was
sentenced to 30 years in prison in 2011 for his role in the fraud. Several
other officers of Taylor Bean and Colonial pleaded guilty for their roles in
the scheme.
In Tuesday's opinion, Watkins rejected Crowe's
argument that it had no professional duty to Colonial because it was not the
bank's internal auditor but merely a provider of services, calling that a
"reed thin" distinction.
He also rejected PwC's argument that the negligence
claim against it must be dismissed because Colonial's own negligence played
a role in its fate, saying that is a question of fact for a jury to decide.
The case is: The Colonial BancGroup Inc et al v
PricewaterhouseCoopers et al, U.S. District Court, Alabama Middle District,
No 11-cv-00746 (Reporting by Dena Aubin; Editing by Kevin Drawbaugh and Tom
Brown)
HP has produced an email in court that it believes
shows executives at Autonomy, a British software company, knew they were
representing their revenues fraudulently when HP acquired their business for
$11 billion.
The email, which comes from federal court documents
filed by HP, was sent to Autonomy CEO Mike Lynch as the acquisition was
going down. It appears to state the company "covered up" a revenue shortfall
by booking sales from Bank of America that allegedly never materialized,*
and that Autonomy's sales reps were chasing "imaginary deals."
Autonomy execs deny HP's accusations, arguing that
HP's mismanagement caused the revenue shortfall and the subsequent
write-down. They say the email is being deliberately taken out of context.
What the email doesn't say, Autonomy says, is that even though the exec who
wrote it was complaining that revenue was coming in behind target, that
revenue was nonetheless greater than the company's projections.
Here is the email, which was written by Autonomy
CFO Sushovan Hussain:
Hewlett-Packard said on Tuesday that it had taken
an $8.8 billion accounting charge, after discovering “serious accounting
improprieties” and “outright misrepresentations” at Autonomy, a British
software maker that it bought for $10 billion last year.
It is a major setback for H.P., which has been
struggling to turn around its operations and remake its business.
The charge essentially wiped out its profit. In the
latest quarter, H.P. reported a net loss of $6.9 billion, compared with a
$200 million profit in the period a year earlier. The company said the
improprieties and misrepresentations took place just before the acquisition,
and accounted for the majority of the charges in the quarter, more than $5
billion.
Shares in H.P. plummeted nearly 11 percent in early
afternoon trading on Tuesday, to less than $12.
Hewlett-Packard bought Autonomy in the summer of
2011 in an attempt to bolster its presence in the enterprise software market
and catch up with rivals like I.B.M. The takeover was the brainchild of Léo
Apotheker, H.P.’s chief executive at the time, and was criticized within
Silicon Valley as a hugely expensive blunder.
Mr. Apotheker resigned a month later. The
management shake-up came about one year after Mark Hurd was forced to step
down as the head of H.P. after questions were raised about his relationship
with a female contract employee.
“I’m both stunned and disappointed to learn of
Autonomy’s alleged accounting improprieties,” Mr. Apotheker said in a
statement. “The developments are a shock to the many who believed in the
company, myself included. ”
Since then, H.P. has tried to revive the company
and to move past the controversies. Last year, Meg Whitman, a former head of
eBay, took over as chief executive and began rethinking the product lineup
and global marketing strategy.
But the efforts have been slow to take hold.
In the previous fiscal quarter, the company
announced that it would take an $8 billion charge related to its 2008
acquisition of Electronic Data Systems, as well as added costs related to
layoffs. Then Ms. Whitman told Wall Street analysts in October that revenue
and profit would be significantly lower, adding that it would take several
years to complete a turnaround.
“We have much more work to do,” Ms. Whitman said at
the time.
Hewlett-Packard continues to face weakness in its
core businesses. Revenue for the full fiscal year dropped 5 percent, to
$120.4 billion, with the personal computer, printing, enterprise and service
businesses all losing ground. Earnings dropped 23 percent, to $8 billion,
over the same period.
“As we discussed during our securities analyst
meeting last month, fiscal 2012 was the first year in a multiyear journey to
turn H.P. around,” Ms. Whitman said in a statement. “We’re starting to see
progress in key areas, such as new product releases and customer wins.”
The strategic troubles have weighed on the stock.
Shares of H.P. have dropped to less than $12 from nearly $30 at their high
this year.
The latest developments could present another
setback for Ms. Whitman’s efforts.
When the company assessed Autonomy before the
acquisitions, the financial results appeared to pass muster. Ms. Whitman
said H.P.’s board at the time – which remains the same now, except for the
addition of the activist investor Ralph V. Whitworth – relied on Deloitte’s
auditing of Autonomy’s financial statements. As part of the due diligence
process for the deal, H.P. also hired KPMG to audit Deloitte’s work.
Neither Deloitte nor KPMG caught the accounting
discrepancies. Deloitte said in a statement that it could not comment on the
matter, citing client confidentiality. “We will cooperate with the relevant
authorities with any investigations into these allegations,” the accounting
firm said.
Hewlett-Packard said it first began looking into
potential accounting problems in the spring, after a senior Autonomy
executive came forward. H.P. then hired a third-party forensic accounting
firm, PricewaterhouseCoopers, to conduct an investigation covering Autonomy
sales between the third quarter 2009 and the second quarter 2011, just
before the acquisition.
The company said it discovered several accounting
irregularities, which disguised Autonomy’s actual costs and the nature of
the its products. Autonomy makes software that finds patterns, data that is
used by companies and governments.
H.P. said that Autonomy, in some instances, sold
hardware like servers, which has higher associated costs. But the company
booked these as software sales. It had the effect of underplaying the
company’s expenses and inflating the margins.
“They used low-end hardware sales, but put out that
it was a pure software company,” said John Schultz, the general counsel of
H.P. Computer hardware typically has a much smaller profit margin than
software. “They put this into their growth calculation.”
An H.P. official, who spoke on background because
of ongoing inquiries by regulators, said the hardware was sold at a 10
percent loss. The loss was disguised as a marketing expense, and the amount
registered as a marketing expense appeared to increase over time, the
official said.
H.P. also contends that Autonomy relied on
value-added resellers, middlemen who sold software on behalf of the company.
Those middlemen reported sales to customers that didn’t actually exist,
according to H.P.
H.P. also claims that that Autonomy was taking
licensing revenue upfront, before receiving the money. That improper
assignment of sales inflated the company’s gross profit margins.pfront,
before receiving the money. It had the effect, the company said, of
significantly bolstering Autonomy’s gross margin.
Deloitte LLP said Wednesday that its member firms
posted a record revenue of $34.2 billion in the fiscal year ended in May.
The professional services firm said its revenue
growth of 6.5% for the year ended May 31 was driven by heightened demand for
its services globally, though demand for consulting services was especially
strong.
Its consulting services posted a 10% rise in
revenue, followed by a 7.7% gain in tax and legal services and a 6.8%
increase in financial advisory services.
Its Americas member firms led growth, with their
aggregate revenue increasing 7.5% in local currency, largely driven by Latin
America.
Europe, Middle East and Africa member firms'
revenue grew 5.8%, while Asia-Pacific firms' revenue climbed 4.9%.
A Chinese animal-feed and hog-production company
has agreed to pay $18 million to settle Securities and Exchange Commission
allegations that it reported fake revenue to meet financial targets and
boost its stock price, the SEC said Monday.
AgFeed Industries Inc. inflated its revenue by $239
million by creating fake invoices for the sale of feed and purported sales
of hogs that didn't actually exist, among other methods, the SEC said when
it filed suit against the company in March. The moves boosted the company's
annual revenue over a 3 ½-year period by amounts ranging from 71% to 103%,
according to the SEC.
AgFeed, which is in Chapter 11 bankruptcy, didn't
admit or deny the allegations in agreeing to the settlement. Five former
AgFeed executives and a former audit committee chairman still face related
SEC allegations, also filed in March.
A lawyer for AgFeed couldn't immediately be reached
for comment.
AgFeed is now based in Tennessee, but it was based
in China before it merged with a U.S. company in 2010 and spread its
operations between the two countries. The company was delisted from the
Nasdaq Stock Market in 2012 and filed for bankruptcy protection in 2013.
The case against AgFeed is among more than 20 the
SEC has filed against U.S.-traded Chinese companies and their officials over
alleged accounting fraud and other issues. Over the past few years,
regulators, auditors and investors have raised questions about more than 170
U.S.-traded Chinese companies about their accounting and disclosure
practices.
The $18 million settlement will be distributed to
victims of the company's fraud, the SEC said. The settlement is subject to
approval by both the Tennessee court where the SEC's lawsuit was filed and
the Delaware court overseeing AgFeed's bankruptcy.
Jensen Comment
AgFeed's auditor Goldman Parks Kurland Mohidin LLP, a California CPA firm,
failed to detect the fraud.
David Tovar
represented himself as a graduate of the University of Delaware but in fact
had no such degree
In the middle of a probe over alleged corruption in
its international division, Walmart has caught its own spokesman in a lie.
David Tovar, Walmart’s vice president of
communications, and the company’s spokesperson as it responds to allegations
that it violated the Foreign Corrupt Practices Act, has said he is
leaving the job he has held since 2006, Bloomberg
reports.
Marilee Jones, dean of admissions at the
Massachusetts Institute of Technology in Cambridge, Mass., resigned
Wednesday after university officials discovered she had fabricated her
academic credentials.
Jones’ resume stated that she had earned degrees
from Rensselaer Polytechnic Institute, Union College and Albany Medical
College, but MIT administrators said these were all false claims. After
receiving a phone call last week suggesting that the university investigate
Jones’ credentials, MIT officials determined that Jones had misrepresented
her academic record. Jones, whose resignation was effective immediately,
worked at MIT for 28 years and had acted as dean of admissions since 1997.
Senior Associate Director of Admissions Stuart
Schmill will act as interim director of admissions, and a search for a new
dean of admissions will begin presently, MIT Dean for Undergraduate
Education Daniel Hastings said in an e-mail to the MIT community Wednesday.
Jones issued a statement explaining that she had
falsified her resume when she first applied for a lower-level position at
the university.
A former accountant at Urban League of Rhode Island
was sentenced on Friday to three years in prison and a 20-year suspended
sentence for stealing more than $250,000 from the struggling non-profit.
Manivone Phimmahom, 42, of Cumberland, a small
woman, was taken away in handcuffs. She must serve a year at the Adult
Correctional Institutions followed by two years of home confinement.
Judge Jeffrey A. Lanphear also ordered her to pay
$251,617 in restitution. Lanphear barred her from visiting any casinos and
ordered her to undergo counseling for her “gambling addiction.”
The court proceeding took about five minutes.
On July 30, Phimmahom pleaded no contest to three
felony charges; embezzlement over $100 and two counts of forgery and
counterfeiting.
The Providence police investigated the case that
was brought to their attention in March 2012. It was prosecuted by Special
Assistant Attorney General Carole McLaughlin.
W. Edwards Deming ---
http://en.wikipedia.org/wiki/W._Edwards_Deming
As both an engineer and a statistician Deming made monumental contributions to
quality control in manufacturing
He is idolized in many parts of the world, especially in Japan where he made
huge contributions to quality of Japanese products
Many companies still seem to have the 7 deadly
diseases and obstacles: lack of constancy of purpose, emphasis on short term
profits, evaluation by performance reviews, merit ratings, management
mobility, seeking examples to follow rather than developing solutions, and
running the company on visible figures alone.
Jensen Comment
When I was in Stanford's Graduate School of Business I took a course from a
psychologist on the faculty of the GSB. For a series of years Professor Harrell
had a grant from the U.S. Navy to collect a huge database on factors suspected,
in combination, leading to "success." He claimed that the biggest factor was the
problem of defining "success" --- what he called the Criterion Problem ---
http://www.trinity.edu/rjensen/Assess.htm#CriterionProblem
There's also a factor of advantage. The parents of
Bill Gates
could afford to send him to Harvard and help him with resources to buy the PC
DOS system for $50,000 from IBM. How many really poor undergraduate students
could have done as well or better if IBM gave away the PC DOS system in some
sort of competitive contest?
The Securities and Exchange Commission is
stepping up its scrutiny of corporate executives who sell shares in their
own companies, announcing a raft of cases Wednesday against insiders for
allegedly breaking rules on disclosing stockholdings and trades.
The action, on an unprecedented scale for
such offenses, is part of the "broken windows" strategy SEC Chairman
Mary Jo White announced almost a
year ago. She said the strategy—named for policing tactics used in New York
that sought to reduce serious crime by not tolerating minor violations—will
mean "even the smallest infractions" are pursued.
SEC investigators decided to step up their
focus on insider transactions because of concerns about poor levels of
compliance, enforcement chief Andrew Ceresney said. The agency filed civil
charges Wednesday against 36 individuals and companies, with none of them
involving a penalty of more than $375,000.
The charges Wednesday are part of the
agency's broader look at how executives and other insiders manage
stockholdings.
The Wall Street Journal in
a page-one article in November 2012 examined instances in which corporate
insiders made timely trades in the
shares of their companies just before the release of potentially
market-moving news. Following the article, federal prosecutors and the SEC
began a probe of trading by seven corporate executives named in the article,
the Journal previously reported. That investigation is continuing, according
to people close to the situation. The executives either denied wrongdoing or
declined to comment.
The Journal's analysis of executives'
trading, based on regulatory filings by 20,237 executives who traded the
week before their companies made news, found that 1,418 executives recorded
average gains of 10% or more within a week. This was close to double the 786
who saw the stock they traded move against them that much.
For the cases announced Wednesday, the
agency says it used algorithms to identify insiders who allegedly repeatedly
broke securities rules requiring trades to be reported promptly.
The dozens of resulting enforcement
actions included charges against 13 officers and directors, 15
shareholders—five individuals and 10 firms—and six companies. Apart from one
case that is being contested, the actions were all settled, without
admissions or denials of liability, for sanctions totaling $2.6 million.
Jensen Comment
This and related robotics articles have important implications for cost
accounting. Have cost accounting innovations kept pace with robotics
manufacturing innovations? I have my doubts.
From the CFO Journal's Morning Ledger on September 29, 2014
After years of a successful tax
strategy that saw its corporate tax rate dwindle,Apple
Inc.is finding itself
in the European Union’s crosshairs, and may need to take out its wallet to
pay back billions of euros. EU regulators will publishon
Tuesdaytheir
preliminary view that tax deals granted to Apple andFiat
SpAviolated EU law, theWSJ’s
Tom Fairless reports. This marks the first
time that the EU has elected to review corporate tax deals through the
region’s state-aid rules.
Apple Chief Financial Officer Luca
Maestritold
the Financial Times, “There’s never been
any special deal, there’s never been anything that would be construed as
state aid.” But people involved in the case say preliminary findings of the
investigation of the iPhone maker’s tax affairs in Ireland, where it has had
a rate of less than 2%, will show that it benefited from illicit state aid
after striking backroom deals.
The EU assault on tax deals for multinational firms comes at
the same time that the Obama administration is working to limit the tax
benefits for U.S. firms that engage in inversion deals to incorporate
overseas—or, in the case ofBurger
King Worldwide Inc., just north of the border in Canada. Are your
finance departments beginning to feel the ground shift under their feet when
it comes to international tax? Send us a note and let us know.
From the CFO Journal's Morning Ledger on September 26, 2014
To unlock the value that can be achieved by adopting COSO's
2013 Internal Control-Integrated Framework, management should take a step
back and evaluate how it is addressing the risks to its organization in
light of its size, complexity, global reach and risk profile. Learn about
leading internal control practices that may help address common challenges
related to implementing the 2013 Framework, as well as perspectives on
applying the framework for operational and regulatory compliance purposes.
From the CFO Journal's Morning Ledger on September 24, 2014
U.S. Treasury officials this week began
their assault on corporate tax-inversion deals by wielding five sections of
the U.S. tax code. Those moves are likely to curb new deals for a while but
are unlikely to stop them completely,
the
WSJ reports. And the changes don’t
appear to be enough to even trigger the clauses inserted in some merger
agreements that would have let buyers walk away if the tax benefits of the
deal were limited by a change in the rules.
Still,
stock markets took the rule changes seriously.
Share prices for several deal targets fell yesterday
on the announcement. Shire
PLC, for instance, which previously agreed to a $54 billion
takeover from American rival
AbbVie Inc., saw
its shares slide by 6% at midday
on Tuesday.
Among the tax strategies targeted in
the rule changes is
the practice of making “hopscotch” loans.
A hopscotch loan occurs when an inverted company makes
a loan to a newly formed foreign parent, instead of the U.S. parent. By
avoiding the U.S., the loan isn’t considered a taxable dividend. Treasury
essentially told firms to stop that.
From the CFO Journal's Morning Ledger on September 22, 2014
Stocks lose favor for pension plans ---
http://blogs.wsj.com/cfo/2014/09/23/stocks-lose-favor-for-pension-plans/?mod=djemCFO_h
To reduce their risk, more corporate pension plans are
selling stocks and buying corporate bonds, CFOJ’s Vipal Monga reports.
Companies in the S&P 500 index had slashed the stockholdings in their
pension funds to 47% at the end of last year from 61% at the end of 2007.
Instead, companies are investing more in 10-year and 30-year corporate bonds
in order to more closely align the average maturity of assets with
liabilities.
From the CFO Journal's Morning Ledger on September 22, 2014
The new issue of National
Affairs features my
article
with Jason
Delisle,
“The Case for Fair-Value Accounting.” We go into a lot of detail
about what fair-value accounting (FVA)
is, why it’s needed, and how both parties have hypocritically
flip-flopped on it.
I’m not someone who is easily
shocked by government misconduct, but when we assembled all the
examples of accounting malfeasance for this article, even I was
surprised at how widespread and deceptive it all is.
Some quick background: The
“fair value” of an investment is its current market price. Built
into the market price of any asset are the expectations of its
future value and the risk that those expectations may not be
met. Both components of the price are critical. All else equal,
investors obviously prefer assets with higher expected returns,
but that preference is mediated by the risk involved. Investors
may prefer low-returning assets with low risk (such as bonds)
over high-return and high-risk assets (such as stocks). FVA cost
estimates naturally include both expected returns and
the cost of risk.
But most federal credit
programs are scored based on expectations only, disregarding the
cost of market risk. When the federal government offers student
loans, for example, it estimates how much students will pay back
and then assumes that its estimate carries no uncertainty. But
no private investor would purchase the right to collect student
loan repayments for just the expected value. The investor would
demand a lower price for such a risky asset.
By placing a greater value on
its assets than the market does, the government generates a
number of bogus “free lunch” scenarios, and politicians try to
exploit them:
For example, in the depths
of the recession, Ohio senator Sherrod Brown proposed that
the federal government buy up private student loans, convert
them to federal loans, and then reduce the interest rates
that borrowers pay. Lenders holding the loans would be paid
face value for them — that is, the government would pay the
lenders the full outstanding balance on the loans. Borrowers
would receive new, better terms and repay the remainder of
their loans to the Department of Education. The CBO was
required under [current law] to show that this transaction
would result in an immediate $9.2 billion profit to the
government.
Bear in mind that this was
a debt swap in which borrowers would pay less interest to
the government than they would pay to private lenders. But,
miraculously, $9.2 billion in new cash for the government
would appear out of thin air as soon as the transaction was
made. This money could then promptly be spent on more
government programs.
Under FVA, Senator Brown’s
scheme would not have generated a profit at all, but rather a
cost of $700 million.
Now consider the Federal
Housing Administration’s single-family mortgage-insurance
program, which provides default guarantees to home-mortgage
lenders:
Home buyers secure
subsidized mortgages, which are loans with terms better than
any private lender would offer without the government
guarantee. Because [government accounting] rules exclude a
market-risk premium, the program appears to both subsidize
homeowners and generate profits for the government,
“earning” a $60 billion free lunch for the government over
ten years. But once a market-risk premium is added to these
tallies, the loan guarantees show a $3 billion annual cost.
The same problem of
disregarding market risk affects public pensions:
As discussed earlier,
[government] accounting enables the federal government to
claim a “profit” simply by purchasing a private-sector loan.
In the pension world, the analogous transaction is the
“pension-obligation bond,” which allows states to conjure
money through an interest-rate arbitrage scheme. In essence,
a state sells a government bond that pays, say, a guaranteed
5% interest rate and then places the proceeds from the bond
sale into the pension fund. The trick is that the pension
fund is assumed to return 8%, so the state nets 3% per year
in “free” money. The fallacy, of course, is that the pension
fund’s 8% expected return carries risk — which is why
investors are willing to buy the (safer) pension-obligation
bonds in the first place.
The examples go on and on, and
the only way to end this mischief is to apply FVA to all
government credit and investment programs.
Audit Firms Unhappy With PCAOB Ruling Requiring Partners in Charge of Audits
to be Named
From the CFO Journal's Morning Ledger on September 22, 2014
Regulators, accounting firms bicker over audit rule ---
http://online.wsj.com/articles/regulators-accounting-firms-bicker-over-audit-rule-1411336193?mod=djemCFO_h
The Public Company Accounting Oversight Board is
getting ready to approve a long-awaited rule requiring accounting firms to
name the lead auditor on each public-company audit they perform every year,
the
WSJ’s Michael Rapoport reports. But while PCAOB
Chairman James Doty wants the disclosure placed in the company’s audited
annual report, the 10-K, accounting firms would rather it be in a separate
form auditing firms file with the PCAOB, known as a Form 2. Accounting firms
worry that putting the name in the annual report would expose their audit
partners to more lawsuits, and could cause other complications, especially
in cases in which a partner has resigned or retired. They also point out
that a Form 2 disclosure would get around the problem of securities laws
that require accountants and their firms to give consent if their names are
to be included in forms to be filed with the SEC, such as the 10-K. The Form
2, which isn’t an SEC document, wouldn’t raise that problem.
Teaching Case on Naming of Auditors In Charge of Audits
From The Wall Street Journal Weekly Accounting Review on September 26,
2014
SUMMARY: Regulators
are poised to require that accounting firms identify exactly who is in
charge of each audit they perform at thousands of publicly traded companies.
Just where that disclosure will happen is still up for debate, however. The
Public Company Accounting Oversight Board, the government's audit regulator,
expects to give final approval in the next few weeks to a long-awaited rule
that will mandate accounting firms disclose the name of their lead
"engagement partner," their partner in charge, on each public-company audit
they perform each year. The move is aimed at increasing accountability for
auditors and giving more information to investors.
CLASSROOM APPLICATION: You
can use this article when covering the rule regarding the disclosure of the
lead engagement partner's name.
QUESTIONS:
1. (Introductory) What rule and related debate is discussed in the
article? What is the reason for this rule?
2. (Advanced) What is the PCAOB? What is its purpose and area of
authority?
3. (Advanced) What are the two disclosure locations under debate?
Why is this in dispute? What does the PCAOB prefer and why? What is the
choice of the accounting industry? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Regulators are poised to require that accounting
firms identify exactly who is in charge of each audit they perform at
thousands of publicly traded companies. Just where that disclosure will
happen is still up for debate, however.
The Public Company Accounting Oversight Board, the
government's audit regulator, expects to give final approval in the next few
weeks to a long-awaited rule that will mandate accounting firms disclose the
name of their lead "engagement partner," their partner in charge, on each
public-company audit they perform each year. The move is aimed at increasing
accountability for auditors and giving more information to investors.
PCAOB Chairman James Doty wants the name disclosed
in the audited company's annual report, also known as the 10-K, in the
section in which the auditor's opinion appears. But big accounting firms are
pushing for disclosure in a different location: a separate report the
auditing firms file with the PCAOB, known as a Form 2.
To those outside the accounting industry, the
debate may sound like splitting hairs. But the location makes a big
difference, say experts on both sides of the issue. Investor advocates say
the company's annual report is the simplest and most prominent place to
disclose the partner's name to investors. Other alternatives like the Form 2
aren't as well known, would make it more difficult for investors to find the
name and would result in delayed disclosure, these advocates add.
"Investors and others don't want to have to go
digging for this information," said Matt Waldron, director of financial
reporting policy for the CFA Institute, which represents chartered financial
analysts who work with individual investors.
He said putting the auditor's name in the company's
10-K report would make it "accessible and transparent." The alternative Form
2 disclosure would be much more complicated for investors to find, he added.
Former Securities and Exchange Commission Chairman
Arthur Levitt, who frequently has called for tougher oversight of the
accounting industry, agrees. "An effort to place [the disclosure] in a
document that few investors read is puzzling. If it's good enough to go in a
document, it's certainly good enough to go in the 10-K."
But accounting firms say putting the name in the
annual report would expose their audit partners to more lawsuits, and could
cause other complications, especially in cases in which a partner has
resigned or retired.
The firms "broadly support enhancing transparency,"
but the Form 2 "would be a more sensible place to provide this information,"
said Cindy Fornelli, executive director of the Center for Audit Quality, an
accounting-industry group.
The Form 2 is an accounting firm's own annual
filing with the PCAOB and is available on the regulator's website.
The accounting industry has raised other concerns
about the prominent display of partner names in the 10-K. According to
securities laws, accountants and their firms must give consent if their
names are to be included in documents filed with the SEC such as annual
reports. Disclosure on Form 2, which isn't an SEC document, wouldn't raise
that problem, Ms. Fornelli says.
The discussion over naming names has been going on
since 2005, and the PCAOB in December issued its current proposal to make
the disclosure mandatory. Some other countries, such as the U.K., already
require audit firms to identify their engagement partners. The PCAOB
proposal is subject to SEC approval before it can come into force.
"I think we will bring this lengthy process to a
good result shortly, and that result will benefit investors while addressing
the concerns" raised by the industry, Mr. Doty said in a statement Friday.
"We are working toward a balanced approach to meet
investors' need for enhanced transparency while appropriately addressing the
most significant concerns raised," said Jeanette Franzel, a PCAOB member who
in the past has expressed reservations about the plan.
The PCAOB's latest proposal called for the
partner's name to be disclosed in the company's annual report. But the board
said in June that its staff was drafting a final version of the requirement
that took into account comments the board had received on "alternative
locations for the disclosure."
Some are concerned that Form 2 disclosure would
delay the release of the partner's name to investors. The accounting firms
file their annual Form 2 with the PCAOB every June, covering the year ending
the previous March. In theory, that could mean the identify of an audit
partner filing an audit report on April 1 of one year might not be disclosed
until June 30 of the following year—a lag of up to 15 months.
SUMMARY: In the latest
of a series of setbacks for a once-highflying global retailer, the U.K.'s
Tesco has suspended four senior executives and called in outside auditors
and legal counsel to investigate a $408.8 million overstatement of its
forecast first-half profit. The newly installed chief executive, Dave Lewis,
said that Tesco had uncovered a "serious" accounting issue, amounting to a
third profit warning in as many months. Tesco has engaged accounting firm
Deloitte LLP to investigate the first-half irregularity. Tesco's shares
plunged nearly 12% and have been cut in half since 2011. The stock is
trading around its lowest level since the fall of 2003.
CLASSROOM APPLICATION: This
article is appropriate for discussions of accounting errors, restatements,
and investigations.
QUESTIONS:
1. (Introductory) What are the facts of the Tesco situation? What
are the estimates for the accounting errors? Are these material amounts? How
did the news affect the market price of the stock?
2. (Advanced) To what accounting activities have the errors been
traced? How do those errors impact the financial statements in the
short-term and in the long-term?
3. (Advanced) The article states that the company has not ruled out
illegal activity. Why is the company mentioning the possibility of illegal
activity? Could these errors be related to illegal activity? Is it likely?
If not related to illegal activity, how could the errors have occurred?
4. (Advanced) Who is Tesco's auditor? Who has the company hired to
investigate the accounting issues? Why didn't the company hire its auditor
to do the investigation work?
Reviewed By: Linda Christiansen, Indiana University Southeast
In the latest of a series of setbacks for a
once-highflying global retailer, the U.K.'s Tesco TSCO.LN -0.56% PLC has
suspended four senior executives and called in outside auditors and legal
counsel to investigate a £250 million ($408.8 million) overstatement of its
forecast first-half profit.
The newly installed chief executive, Dave Lewis,
said Monday that Tesco had uncovered a "serious" accounting issue, amounting
to a third profit warning in as many months.
The company said an employee alerted its general
counsel on Friday about an issue involving the early booking of income and
delayed booking of costs. Tesco said it had done a preliminary investigation
into its U.K. food business and hadn't ruled out illegal activity but would
wait until the results of the investigation were known.
The accounting error puts in the line of fire a
board of directors long criticized by shareholders and industry analysts for
lacking retail experience, and exposes the scale of the problem faced by Mr.
Lewis in only his fourth week at the company.
"We have uncovered a serious issue and have
responded accordingly," said Mr. Lewis, the former Unilever ULVR.LN +0.31%
PLC executive who took up the reins at Tesco on Sept. 1, a month earlier
than expected. The former CEO, Philip Clarke, was dismissed in July.
Tesco—which vies with Carrefour SA CA.FR +0.14% of
France for the position of world's second-largest retailer by revenue behind
Wal-Mart Stores Inc. WMT -1.25% —won applause for its swift growth and
global ambitions through the 1990s and early 2000s. But it has weakened
since the 2008 economic downturn. It took heavy losses on U.S. chain Fresh &
Easy, unloading it last year to Ron Burkle's Yucaipa Cos., and has retreated
from several other international markets. Its still-leading market share in
the U.K. has steadily eroded in the face of competition from both higher-end
grocery stores and aggressive discounters.
Among Tesco's main problems has been its lack of an
executive clearly in charge of finances. Laurie McIlwee stepped down as
chief financial officer in April but won't be replaced until December, when
Alan Stewart —currently at Tesco's rival Marks & Spencer Group MKS.LN -0.40%
PLC—takes over the role.
Mr. McIlwee has remained on the company's payroll
as "CFO emeritus," according to a Tesco spokesman. In that role he offers
advice but doesn't sit on the company's executive board and wasn't involved
in decisions related to the accounting irregularity.
Instead, Tesco's finances have been run directly by
the CEO's office during the past three months, according to a person with
direct knowledge of the situation. In that time, Tesco has issued three
profit warnings.
Mr. Clarke, who remains a Tesco employee, was
acting as both CEO and CFO until the end of August, according to the person.
A Tesco spokesman said Mr. Lewis assumed the interim-CFO role when he took
over as CEO.
From the CFO Journal's Morning Ledger on September 22, 2014
U.K. supermarket operator
Tesco PLC issued
its fourth profit warning in three years and said it is investigating why it
overstated its most recent profit forecast by more than $400 million,
the
WSJ’s Lisa Fleisher and Peter Evans report.
Newly installed Chief Executive Dave Lewis said the
company uncovered a “serious” accounting issue involving the early booking
of revenue and delayed booking of costs. Four senior executives have been
suspended—but don’t look for a finance chief to be among them.
Tesco has already named a new CFO in July in
Alan Stewart, who was previously the head of finance for
Marks & Spencer Group PLC.
But Mr. Stewart doesn’t take over until
Dec. 1, as he sits out a noncompete clause
in his contract from his previous employer. The prior CFO, Laurie McIlwee,
resigned from the position
April 4, though the company said at the time
he would remain as an employee until
Oct. 3.
After Mr. McIlwee stepped down,
responsibility for finance flowed to former Chief Executive Philip Clarke,
who was supposed to step down in October. But the company later said in
August that Mr. Clarke would be replaced a month earlier than planned by
Dave Lewis, as the company struggled to find its footing amid profit
warnings and the ongoing management shakeup. As it turns out, CFOs come in
handy. How does your company manage succession during a period of crisis?
Send us an email, or tell us in the comments.
The chain
has been forced to call in accountants from Deloitte
to investigate the massive shortfall, and the share
price is down by more than 8% at the time of
writing.
Marc Kimsey at
Accendo Markets offered investors his brutal take in
a note titled “every little hurts” Monday morning:
“Tesco is no
longer a viable investment. Traders are clearing the
books of all holdings and reallocating funds in
sector peers. The last two years have tested
investors' patience, but with the dividend being cut
back and today's revelation, justification to hold
is non-existent.”
Analysts at Cantor
Fitzgerald said they were expecting an even worse
drop in profits: a £300m overestimation would mean a
fall in earnings of about 55% on sales excluding
VAT. Tesco had revenues of £63.557 billion in
2013-2014, and the slump in profit is making margins
look increasingly thin.
In a note to
clients, Cantor’s Mike Dennis said: “The read across
is that Tesco may now have to sell assets across its
UK and International portfolio to pay for this
behaviour.”
The new boss
at Tesco isn't one to shy away from massive cuts —
nicknamed 'Drastic' Dave Lewis, he
cut 40% of the firm's costs
and laid off 300 workers as
chairman of Unilever UK. With more than half a
million employees, Tesco is the UK's second-largest
private employer, and major workforce cuts could be
extremely painful.
On Monday, Lewis
said "we have uncovered a serious issue and have
responded accordingly" and that he expected Tesco
"to operate with integrity and transparency."
From the CFO Journal's Morning Ledger on August 120, 2014
PCAOB
watchdog reviews auditing of estimates, mark-to-market accounting The U.S. government’s auditing watchdog will review audit
procedures for complex accounting estimates and mark-to-market
accounting, with the aim to improve current practices,
CFOJ’s Emily Chasan reports.
Auditors’ use of mark-to-market accounting and
their reliance on management’s accounting estimates have raised
frequent red flags.
Jensen Comment
The key to reviewing estimates is to conduct serious analysis of
underlying assumptions.
I once wrote a research monograph on this topic for the American
Accounting Association
Volume No. 19. Review of Forecasts: Scaling and
Analysis of Expert Judgments Regarding Cross-Impacts of
Assumptions on Business Forecasts and Accounting Measures
AAA Studies in Accounting Research
http://aaahq.org/market/display.cfm?catID=5
By Robert E. Jensen. Published 1983, 235 pages.
I think older AAA research and teaching
monographs should be digitized and made available free to the public.
Iowa Sen. Charles Grassley suggested that AIG
executives should accept responsibility for the collapse of the insurance giant
by resigning or killing themselves. The Republican lawmaker's harsh comments
came during an interview Monday with Cedar Rapids, Iowa, radio station WMT . . .
Sen. Charles Grassley wants AIG executives to apologize for the collapse of the
insurance giant — but said Tuesday that "obviously" he didn't really mean that
they should kill themselves. The Iowa Republican raised eyebrows with his
comments Monday that the executives — under fire for passing out big bonuses
even as they were taking a taxpayer bailout — perhaps should "resign or go
commit suicide." But he backtracked Tuesday morning in a conference call with
reporters. He said he would like executives of failed businesses to make a more
formal public apology, as business leaders have done in Japan. Noel Duara, "Grassley: AIG execs
should repent, not kill selves," Yahoo News, March 17, 2009 ---
http://news.yahoo.com/s/ap/20090317/ap_on_re_us/grassley_aig
AIG now says it paid out more than $454 million in
bonuses to its employees for work performed in 2008. That is nearly four times
more than the company revealed in late March when asked by POLITICO to detail
its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm
paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.
The figure Ashooh offered was, in turn, substantially higher than company CEO
Edward Liddy claimed days earlier in testimony before a House Financial Services
Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I
think it might have been in the range of $9 million.” Emon Javers, "AIG bonuses four times
higher than reported," Politico, May 5, 2009 ---
http://www.politico.com/news/stories/0509/22134.html
From The Wall Street Journal Accounting Weekly Review on
March 30, 2007
SUMMARY: Ernst & Young (E&Y) "was
censured by the Securities and Exchange Commission (SEC) and
will pay $1.5 million to settle charges that it compromised its
independence through work it did in 2001 for clients American
International Group Inc. and PNC Financial Services Group.
"Regulators claimed AIG hired E&Y to develop and promote an
accounting-driven financial product to help public companies
shift troubled or volatile assets off their books using
special-purpose entities created by AIG." PNC accounted
incorrectly for its special purpose entities according to the
SEC, who also said that "PNC's accounting errors weren't
detected because E&Y auditors didn't scrutinize important
corporate transactions, relying on advice given by other E&Y
partners.
QUESTIONS:
1.) What are "special purpose entities" or "variable interest
entities"? For what business purposes may they be developed?
2.) What new interpretation addresses issues in accounting for
variable interest entities?
3.) What issues led to the development of the new accounting
requirements in this area? What business failure is associated
with improper accounting for and disclosures about variable
interest entities?
4.) For what invalid business purposes do regulators claim that
AIG used special purpose entities (now called variable interest
entities)? Why would Ernst & Young be asked to develop these
entities?
5.) What audit services issue arose because of the combination
of consulting work and auditing work done by one public
accounting firm (E&Y)? What laws are now in place to prohibit
the relationships giving rise to this conflict of interest?
Reviewed By: Judy Beckman,
University of Rhode Island
From the
CFO Journal's Morning Ledger on September 12, 2014
Internet marketplace company
eBay Inc. has
been a big buyer of smaller companies, completing dozens of acquisitions in
the last decade. Bob Swan, the company’s long-time CFO,
told CFO Journal’s Emily Chasan how it has focused
on honing its integration strategy, as about 30% of the company’s growth now
stems from those purchases.
“If you read the literature about failed
acquisitions, there’s a laundry list of common themes: strategically
disconnected, valuation in excess of synergies, management teams not deeply
engaged in making acquisitions successful,” Mr. Swan said. “I think from an
external standpoint it’s simply understanding others’ lessons learned and
incorporating them into how we go about doing deals ourselves.”
So how does eBay make the choice between when
to build a capability or just buy it outright? A lot of it comes down to
speed—the speed of movement in the marketplace, compared with the speed at
which eBay can go it alone. “If somebody else has a competency or a
capability, that if we acquire now it will be quicker than building it, and
can accelerate the path of bringing new technologies to market, that is an
important aspect of whether to buy or build.”
From the
CFO Journal's Morning Ledger on September 10, 2014
Franchise Chain Disclosures
For would-be entrepreneurs, sizing up a franchise chain can be challenging,
because the disclosure requirements are somewhat limited. Chains aren’t
required by law to disclose their franchisees’ first-year average sales and
failure rates, for example, although the Federal Trade Commission does
require them to share recent bankruptcy filings and prior litigation.
That missing data may help explain why
certain franchise brands have been such repeat offenders when it comes to
charge-offs of Small Business Administration loans. A
Wall Street Journal analysis
of SBA-backed franchise loans in the past decade found that
Quiznos,
Cold Stone Creamery,
Planet Beach Franchising
and Huntington Learning
Centers Inc. ranked among the 10 worst franchise brands in terms of
SBA loan defaults.
That means franchisees of those 10
brands have left taxpayers on the hook for 21% of all franchise-loan
charge-offs in the past decade. The finding comes as franchising is booming
in popularity, in part because many people see it as an easier route to
entrepreneurship in an uncertain economic landscape.
From the
CFO Journal's Morning Ledger on September 10, 2014
PCAOB warns auditors to look closer at revenues ---
http://blogs.wsj.com/cfo/2014/09/09/pcaob-warns-auditors-to-look-closer-at-revenues/?mod=djemCFO_h
The government’s audit watchdog issued an alert reminding auditors to be
more rigorous in looking at company revenues, following a spike in
deficiencies in that area, report Michael Rapoport and Noelle Knox for CFO
Journal. The Public Company Accounting Oversight Board flagged common
problems, including: testing the timing of when revenue is booked;
evaluating whether companies have made the proper disclosures about their
revenue; and responding to fraud risks associated with revenue.
The government’s audit watchdog issued a 33-page
alert Tuesday reminding auditors to be more rigorous in looking at company
revenues, following a spike in deficiencies in that area.
The Public Company Accounting Oversight Board
flagged common problems, including: testing the timing of when revenue is
booked; evaluating whether companies have made the proper disclosures about
their revenue; and responding to fraud risks associated with revenue.
“Revenue is one of the largest accounts in the
financial statements and an important driver of a company’s operating
results, James Doty, the PCAOB’s chairman, said in a statement. “Given the
significant risks involved when auditing revenue, auditors should take note
of the matters discussed in this practice alert in planning and performing
audit procedures over revenue.”
The board advised audit firms to revisit their
methodologies and consider increased staff training.
The alert follows a similar note to auditors the
board sent to auditors last year after its inspectors saw a surge in
internal control auditing deficiencies. As CFO Journal reported the PCAOB’s
alert led to more document requests and closer audits of internal controls,
which act as a company’s first line of defense against fraud and financial
misstatements.
PwC: In depth: Revenue standard is final – A comprehensive look at
the new model (Real estate industry supplement) ---
SUMMARY: "New rules released
Wednesday[, May 28, 2014, jointly by the
FASB and IASB] will overhaul the way businesses record revenue...capping a
12-year project....The new standards...will take effect in 2017 [and will
cause] ... a broad array of companies...either to speed up or slow down the
rate at which they book at least some of their revenue....Companies were
cautious in assessing the potential impact of the overhaul...." Many
companies are optimistic about eliminating the many inconsistencies across
industries in current U.S. revenue recognition requirements. With greater
consistency in timing of revenue recognition, the new standard also should
help improve reporting issues because "...allegations of improperly speeding
up or deferring revenue have been at the heart of many accounting-fraud
scandals."
CLASSROOM APPLICATION: The article may be used in any financial
accounting course covering revenue recognition. It is more helpful to access
information from the FASB's web site to understand the objectives and
requirements of the standard. The summary of the Accounting Standards Update
(ASU) is linked in the first question. The article focuses more on the
expected results and effects across different industries.
2. (Introductory) According to the article, what types of
industries or products will be most affected by the new requirements?
3. (Introductory) Review the graphic entitled "On the Books" which
compares accounting for software, wireless devices, and automobiles under
present GAAP and the new revenue recognition requirements. How do the new
requirements move the accounting to be more similar across these three
products?
4. (Advanced) Consider the current requirements for revenue
recognition in these three products. What was the reasoning behind these
differences? That is, what is the determining factor for the point of
recognizing a sale and how does it differ across these three products? Cite
any source you use in developing your answer.
Reviewed By: Judy Beckman, University of Rhode Island
New rules released Wednesday will overhaul the way
businesses record revenue on their books, capping a 12-year project that
will affect companies ranging from software firms to auto makers to wireless
providers.
The new standards, issued jointly by U.S. and
global rule makers, will take effect in 2017, prompting a broad array of
companies—from software giants like Microsoft Corp. MSFT -0.42% and Oracle
Corp. ORCL +0.23% to major appliance makers—either to speed up or slow down
the rate at which they book at least some of their revenue.
The rules aim to simplify and inject more
uniformity into one of the most basic yardsticks of a company's
performance—how well its products or services are selling.
"It's one of the most important metrics for
investors in the capital markets," said Russell Golden, chairman of the
Financial Accounting Standards Board, which sets accounting rules for U.S.
companies and collaborated on the new rules with the global International
Accounting Standards Board.
Companies were cautious in assessing the potential
impact of the overhaul, but some were optimistic. "We've been waiting for it
for a long time," said Ken Goldman, chief financial officer of Black Duck
Software Inc., a provider of software and consulting services. "This levels
the playing field and takes a lot of the ambiguity out of what are overly
restrictive rules."
The rules are designed to replace fragmented and
inconsistent standards under which companies in different industries often
record their revenue differently and sometimes book a portion of it well
before or after the sales that generate it.
"We wanted to make sure there was a consistent
method for companies to identify revenue," said the FASB's Mr. Golden.
But the new rules could make corporate earnings
more volatile, accounting experts said, by changing the timing of when
revenue is recorded. They also could lead to increased costs for companies
as they seek to track their performance while providing the additional
disclosure the new standards require.
"This has at least the potential to affect every
company," said Joel Osnoss, a partner at accounting firm Deloitte & Touche
LLP. They "really should look at the standard" and ask how the revenue-rule
changes will affect them, he said.
Accounting rule makers have long focused on the
question of when businesses should book revenue, because it touches every
company and can be an area ripe for fraud. Allegations of improperly
speeding up or deferring revenue have been at the heart of many
accounting-fraud scandals.
In 2002, for example, Xerox Corp. XRX +0.93% paid a
big settlement to the Securities and Exchange Commission to resolve
allegations that it had improperly accelerated revenue. Xerox didn't admit
or deny the SEC's allegations.
The new rule's impact will be most felt in a
handful of industries in which goods and services are "bundled" together and
parts of that package are provided long before or after customers pay for
them. These include such benefits as maintenance that comes with the
purchase of a new car, or software upgrades given to customers who bought
the original program.
In such cases, the time at which companies
recognize revenue is often out of sync by months or years with when
customers get the goods and services associated with it. For instance, when
auto and appliance makers sell their products, they typically book the
purchase price immediately, but the transactions can also include free
maintenance or repairs under warranty that the company might not provide for
months or years.
Under the new rules, the manufacturer would book
less revenue up front and more revenue later, because some of the revenue
from the car or appliance would be assigned to cover future service costs.
As a result, some of a company's revenue might be stretched over a longer
period.
Conversely, software makers such as Microsoft and
Oracle might be able to recognize some revenue more quickly. Software
companies now often have to recognize their revenue over time, because they
have to wait until all of the software upgrades and other pieces of a sale
are delivered to the customer. The new rules will make it easier for
companies to value upgrades separately and so recognize more of the
software's overall revenue upfront, Mr. Golden said.
Microsoft and Oracle declined to comment.
Similarly, wireless phone companies like Verizon
Communications Inc. VZ +0.32% and AT&T Inc. T -0.14% might book some revenue
faster under the new rules. Currently, a wireless company books revenue each
month, as customers receive wireless services—but none of that revenue is
allocated to any phone that customers get free or for a low price.
That will change under the new rules; some of the
monthly revenue will be applied to those phones. And since customers get the
phone when they first sign up, at the beginning of their contracts, that
will have the effect of pulling the revenue forward in time, allowing the
company to book it earlier.
Verizon and AT&T didn't have any immediate comment.
Even companies that aren't affected so much by the
timing changes will have to disclose more about the nature and certainty of
their revenue—something Deloitte & Touche's Mr. Osnoss said will help
investors. "I think investors are going to have much more of a view into the
company."
But companies may find that providing that
information complicates their lives and raises their costs. "For the
majority of people, it's going to be difficult," said Peter Bible, chief
risk officer for accounting firm EisnerAmper and a former chief accounting
officer at General Motors Co. GM +0.39%
From the
CFO Journal's Morning Ledger on September 8, 2014
Conflict minerals reporting can’t seem to
get a break
First, the rule itself, required by Dodd-Frank, was found unconstitutional
because it amounted to compelled speech, a ruling that forced the SEC to
water it down. As a result, companies don’t have to declare whether conflict
minerals are in their supply chains, but instead merely confirm that they’ve
looked into it. But now the government has had to admit that it isn’t up to
the challenge of figuring out which smelters are financing the violence in
the Congo either.
The Commerce Department already missed its
January 2013 deadline under Dodd-Frank to list “all known conflict-mineral
processing facilities world-wide.” But
on Friday, though the department published a list of 400 sites
from Australia to Brazil and Canada, it also conceded that it “does not have
the ability to distinguish” which are being used to fund militia groups,
CFOJ’s Emily Chasan reports.
Companies including
Intel Corp. and
Apple Inc. said
they spent years and millions of dollars investigating their supply chains
for evidence of metals from mining operations that are paying for violence.
A dozen companies acknowledged their suppliers may have obtained minerals
from such mines, but the vast majority said they simply didn’t know. “At the
end of the day, the conflict minerals rule creates the worst outcome—it has
not helped lessen the conflicts in the Congo and creates economic harm in
the U.S.,” said Tom Quaadman, vice president of the U.S. Chamber of
Commerce’s Center for Capital Markets Competitiveness.
Corporate Tax
Inversions: The Beautiful and the Ugly
From the
CFO Journal's Morning Ledger on August 27, 2015
More corporate finance divisions are looking into the details of what an
inversion would actually do for their tax bill, even if their companies
ultimately aren’t willing to take the plunge and decamp for a foreign
country,CFOJ’s Emily Chasan reports.
A foreign domicile often will mean a lower
overall tax rate, but a thorough analysis must also factor the cost of
moving some management overseas, reorganizing the company, the
sustainability of a move and its political consequences.
And the political consequences, though at this point mostly limited to
accusations of unpatriotic behavior, could become more serious if
legislators make good on their threats. The Treasury Department is currentlyreviewing its options for limiting the tax
benefitsof an inversion. And since
Burger King Worldwide Inc. announced its
intention to relocate to Canada
through a merger with Tim Hortons Inc., the iconic burger chain has
come under direct criticism from lawmakers. Sen. Dick Durbin (D., Ill.)
said, “I’m disappointed in Burger King’s decision to renounce their American
citizenship” and added that “with every new corporate inversion, the tax
burden increases on the rest of us to pay what these corporations won’t.”
The companies say the deal is not about taxes, but about growth (more on
that below).
But the Burger King deal highlights what chief financial officers are
learning in their investigations of inversion deals: that the tax benefits
are not so straightforward, and often lurk in the details. Writing for Heard
on the Street, John Carney notes that Canada offers a generous tax break
for profits from countries with which it has a tax treaty. These get counted
as “exempt surplus,” which isn’t taxed at all by Canada. And in some of
Burger King’s fastest-growing markets, a Canadian domicile would also give
it the benefit of “tax sparing”—a system that credits companies even for
taxes that aren’t actually paid as part of a complex incentive to invest in
developing countries.
Whopper
Deal --- Burger King Headquarters May Move to Canada: There are tax savings in
addition to a purchase of Canada's Tim Horton's Inc.
From the CFO Journal's Morning Ledger on August 25, 2015
The inversion wave that overtook the pharmaceutical and drug retail
industries continues to spread, and now one of America’s most storied
hamburger chains is looking to decamp for a lower-tax domicile to the north.
And despite the saber-rattling from American lawmakers who fear that such
moves will drain U.S. tax coffers, Burger King is planning to make the move
without the protection of a provision that would let it walk away from the
deal even if the tax benefits are taken away through new legislation. That
may suggest that American big business perceives the U.S. government as
unwilling, or incapable, of making any serious moves to restrain inversions.
“Some people are calling these companies ‘corporate deserters.’ ”
That is what President Obama said last month about the recent wave of tax
inversions sweeping across corporate America, and he did not disagree with
the description. But are our nation’s business leaders really so
unpatriotic?
A tax inversion occurs when an American company merges with a foreign one
and, in the process, reincorporates abroad. Such mergers have many motives,
but often one of them is to take advantage of the more favorable tax
treatment offered by some other nations.
Such tax inversions mean less money for the United States Treasury. As a
result, the rest of us end up either paying higher taxes to support the
government or enjoying fewer government services. So the president has good
reason to be concerned. Continue reading the main story Related Coverage
Walgreen on Wednesday said it would take over the British pharmacy retailer
Alliance Boots but would not, after all, move its headquarters overseas to
save on taxes. Tax Reform: Inverting the Debate Over Corporate InversionsAUG.
6, 2014
Yet demonizing the companies and their executives is the wrong response. A
corporate chief who arranges a merger that increases the company’s after-tax
profit is doing his or her job. To forgo that opportunity would be failing
to act as a responsible fiduciary for shareholders.
Of course, we all have a responsibility to pay what we owe in taxes. But no
one has a responsibility to pay more.
The great 20th-century jurist Learned Hand — who, by the way, has one of the
best names in legal history — expressed the principle this way: “Anyone may
arrange his affairs so that his taxes shall be as low as possible; he is not
bound to choose that pattern which best pays the treasury. There is not even
a patriotic duty to increase one’s taxes.”
If tax inversions are a problem, as arguably they are, the blame lies not
with business leaders who are doing their best to do their jobs, but rather
with the lawmakers who have failed to do the same. The writers of the tax
code have given us a system that is deeply flawed in many ways, especially
as it applies to businesses.
The most obvious problem is that the corporate tax rate in the United States
is about twice the average rate in Europe. National tax systems differ along
many dimensions, making international comparisons difficult and
controversial. Yet simply cutting the rate to be more in line with norms
abroad would do a lot to stop inversions.
A more subtle problem is that the United States has a form of corporate tax
that differs from that of most nations and doesn’t make much sense in the
modern global economy.
A main feature of the modern multinational corporation is that it is, truly,
multinational. It has employees, customers and shareholders around the
world. Its place of legal domicile is almost irrelevant. A good tax system
would focus more on the economic fundamentals and less on the legal
determination of a company’s headquarters.
Most nations recognize this principle by adopting a territorial corporate
tax. They tax economic activity that occurs within their borders and exclude
from taxation income earned abroad. (That foreign-source income, however, is
usually taxed by the nation where it is earned.) Six of the Group of 7
nations have territorial tax systems.
Continued in article
Hi again
Richard,
Perhaps you can clear up my misunderstanding of how large LLP partnerships may
be taxed as corporations in the U.K.
United
Kingdom
The new
form of
limited liability partnership (LLP),
created in 2000, is similar to a US LLC in being tax neutral: member partners
are taxed at the partner level, but the LLP itself pays no tax. It is treated as
a body corporate for all other purposes including
VAT. Otherwise, all companies, including
limited companies and US LLCs, are treated
as bodies corporate subject to
United Kingdom corporation tax
if the profits of the entity belong to the entity and not to its members. http://en.wikipedia.org/wiki/Limited_liability_company
We’ve also got a second, related problem, which I call the
“never-heres.”
They include formerly private companies like Accenture ACN 0.17% , a
consulting firm that was spun off from Arthur Andersen, and disc-drive maker
Seagate STX , which began as a U.S. company, went private in a 2000 buyout
and was moved to the Cayman Islands, went public in 2002, then moved to
Ireland from the Caymans in 2010. Firms like these can duck lots of U.S.
taxes without being accused of having deserted our country because
technically they were never here. So far, by Fortune’s count, some 60 U.S.
companies have chosen the never-here or the inversion route, and others are
lining up to leave.
"Measuring Pension Liabilities under GASB Statement No. 68," by John W.
Mortimer and Linda R. Henderson, Accounting Horizons, September 2014,
Vol. 28, No. 3, pp. 421-454 ---
http://aaajournals.org/doi/full/10.2308/acch-50710
While
retired government employees clearly depend on public sector defined benefit
pension funds, these plans also contribute significantly to U.S. state and
national economies. Growing public concern about the funding adequacy of
these plans, hard hit by the great recession, raises questions about their
future viability. After several years of study, the Governmental Accounting
Standards Board (GASB) approved two new standards, GASB 67 and 68, with the
goal of substantially improving the accounting for and transparency of
financial reporting of state/municipal public employee defined benefit
pension plans. GASB 68, the focus of this paper, requires state/municipal
governments to calculate and report a net pension liability based on a
single discount rate that combines the rate of return on funded plan assets
with a low-risk index rate on the unfunded portion of the liability. This
paper illustrates the calculation of estimates for GASB 68 reportable net
pension liabilities, funded ratios, and single discount rates for 48 fiscal
year state employee defined benefit plans by using an innovative valuation
model and readily available data. The results show statistically significant
increases in reportable net pension liabilities and decreases in the
estimated hypothetical GASB 68 funded ratios and single discount rates. Our
sensitivity analyses examine the effect of changes in the low-risk rate and
time period on these results. We find that reported discount rates of weaker
plans approach the low-risk rate, resulting in higher pension liabilities
and creating policy incentives to increase risky assets in pension
portfolios.
Jensen Comment
But industries caught up in pollution and other environmental-protection
regulations had best look outside activist California in the grips of politics
dominated by progressives and lawmakers to the left of progressives. Also it's
not a good time for industries needing lots of water to expand in California.
Why can't Nevada make Tesla-type deals to all manufacturers? Reason 1 is the
shortage of water, especially in water-starved Las Vegas. Reason 2 is the
dearth of skilled labor when robots can't do the jobs. Nevada has very high
unemployment, but most of the unemployed are low in advanced skills. There are
lots of high-tech workers in California who are probably not ecstatic over
"advanced manufacturing."
From the CFO Journal's Morning Ledger on September 15, 2014 ---
Iowa Sen. Charles Grassley suggested that AIG
executives should accept responsibility for the collapse of the insurance giant
by resigning or killing themselves. The Republican lawmaker's harsh comments
came during an interview Monday with Cedar Rapids, Iowa, radio station WMT . . .
Sen. Charles Grassley wants AIG executives to apologize for the collapse of the
insurance giant — but said Tuesday that "obviously" he didn't really mean that
they should kill themselves. The Iowa Republican raised eyebrows with his
comments Monday that the executives — under fire for passing out big bonuses
even as they were taking a taxpayer bailout — perhaps should "resign or go
commit suicide." But he backtracked Tuesday morning in a conference call with
reporters. He said he would like executives of failed businesses to make a more
formal public apology, as business leaders have done in Japan. Noel Duara, "Grassley: AIG execs
should repent, not kill selves," Yahoo News, March 17, 2009 ---
http://news.yahoo.com/s/ap/20090317/ap_on_re_us/grassley_aig
AIG now says it paid out more than $454 million in
bonuses to its employees for work performed in 2008. That is nearly four times
more than the company revealed in late March when asked by POLITICO to detail
its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm
paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.
The figure Ashooh offered was, in turn, substantially higher than company CEO
Edward Liddy claimed days earlier in testimony before a House Financial Services
Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I
think it might have been in the range of $9 million.” Emon Javers, "AIG bonuses four times
higher than reported," Politico, May 5, 2009 ---
http://www.politico.com/news/stories/0509/22134.html
From The Wall Street Journal Accounting Weekly Review on
March 30, 2007
SUMMARY: Ernst & Young (E&Y) "was
censured by the Securities and Exchange Commission (SEC) and
will pay $1.5 million to settle charges that it compromised its
independence through work it did in 2001 for clients American
International Group Inc. and PNC Financial Services Group.
"Regulators claimed AIG hired E&Y to develop and promote an
accounting-driven financial product to help public companies
shift troubled or volatile assets off their books using
special-purpose entities created by AIG." PNC accounted
incorrectly for its special purpose entities according to the
SEC, who also said that "PNC's accounting errors weren't
detected because E&Y auditors didn't scrutinize important
corporate transactions, relying on advice given by other E&Y
partners.
QUESTIONS:
1.) What are "special purpose entities" or "variable interest
entities"? For what business purposes may they be developed?
2.) What new interpretation addresses issues in accounting for
variable interest entities?
3.) What issues led to the development of the new accounting
requirements in this area? What business failure is associated
with improper accounting for and disclosures about variable
interest entities?
4.) For what invalid business purposes do regulators claim that
AIG used special purpose entities (now called variable interest
entities)? Why would Ernst & Young be asked to develop these
entities?
5.) What audit services issue arose because of the combination
of consulting work and auditing work done by one public
accounting firm (E&Y)? What laws are now in place to prohibit
the relationships giving rise to this conflict of interest?
Reviewed By: Judy Beckman,
University of Rhode Island
Regulators and standard setters have lately
been renewing their focus on disclosure effectiveness, and certain projects
at the SEC, the FASB and the IASB have been gaining momentum. Although those
projects are in the early stages, their common goal of making comprehensive
improvements to the U.S. public company disclosure regime may increase their
likelihood of success. While views on how to achieve improvements may
differ, most seem to agree that the entire disclosure system is due-if not
overdue-for modernization.
SEC gives
internal auditor $300,000 whistleblower award
The Securities and Exchange Commission is giving a $300,000 whistleblower
award to a corporate internal auditor who provided information that directly
resulted in an enforcement action. The auditor had reported the wrongdoing
internally, but when no action was taken within 120 days, the auditor turned
to the SEC. Awards to whistleblowers range from 10% to 30% of the money
collected from an enforcement action.CFO.com
(8/29)
Jensen
Comments
Such puny settlements might be beneficial to career advancement, but they are
more likely to be just the opposite if they are the cause of getting fired and
the cause of troubles finding other jobs. Whistleblowers are seldom heroes in
USA except where national security is involved.
In my previous post, I expressed my opposition to the FASB’s proposal
for replacing the LOCOM rule for inventory with “lower of cost or net
realizable value.”
I stated that the extant U.S. GAAP on LOCOM embodied a principle of
measuring the economic utility of an asset that exists nowhere else. It is
worth preserving, if for no other reason, than to show students of
accounting and business that bridges between financial reporting and
economics can indeed be construct. As the last one is being blasted to
smithereens, it’s legitimate to ask why there aren’t more such bridges.
But, I was surprised when my post led to this comment by a former FASB
member, whom I respect greatly and choose not to name:
“Unlike Tom who believes this is an assault on users’ information needs,
I think this is a ho hum matter. The answers are not likely to differ
greatly in most cases and it’s quite possible that most companies will
find that they just keep doing what they were already doing. I don’t
think an extensive basis for conclusions is needed when the Board just
wants to simplify what is essentially a mechanical process.”
I took these comments to heart in thecomment letterI just submitted to the FASB. I hope expressed
clearly, these three points:
First, if you believe in the same economic principles that the members of
the Committee on Accounting Procedure believed in back in 1947, then logic
dictates that the proposal violates the FASB’s pledge to not promulgate
“simplifications” that reduce the usefulness of the information provided to
users of financial statements.
Second, as the former FASB member said, it’s quite possible that most users
will continue to do what they have been doing, so there won’t be an
appreciable savings of time and effort. Instead of eliminating LOCOM, the
Board could have issued a set of indicators to clarify when the “floor” and
“ceiling” tests would not be needed.
Third, the ED is a seriously flawed document, that sends an implicit message
that comments on the key issues are not welcome. I’ll quote from my comment
letter:
The Board’s simplification initiative seems to have a single objective
and a single constraint. This makes it self-evident that
the most important questions the FASB should have for stakeholders are:
(1) whether the simplification objective is met; and (2) whether the
information usefulness constraint is violated. Both of these questions
are arguably subsumed in “Question 1,” but I suggest that in future
proposals they should be separated and explicitly addressed.
Moreover, the ED does not disclose how the Board has concluded that its
information usefulness constraint is not violated. In my opinion,
this is an unconscionable omission. [emphasis supplied]
* * *
* * * *
As I stated in my post, but did not state in my comment letter, I smell a
rat. I believe that there is more at stake than “simplifying” the
accounting for inventory. For one thing, LOCOM is just the tip of the
iceberg of a very complex topic (e.g., LIFO), for another the FASB’s
proposal assures that there will be fewer write downs; and when they occur,
many will be for less than under the current rules.
I always
thought that the Lower of Cost or Market valuation of inventory had a net
realizable override (NRV) when NRV applies to damaged or obsolete inventory was
less than historical cost. My 1932 edition of the Accountant's Handbook
by Bill Paton on Page 32 states that "imperfect, defective, damaged, or obsolete
goods should be valued at ... net selling price."
If
inventory is not ""imperfect, defective, damaged, or obsolete," the historical
cost should not (in my personal opinion) be written down for downward for
transitory market price movements that have a high probability of recovering.
For example, a farmer's corn inventory costing $3.47 a bushel should not, in my
opinion, be written down every time the spot price falls below $3.47 unless the
market has totally collapsed (e.g., if Congress no longer requires ethanol in
gasoline) or the corn is damaged such as when the corn on hand has mold or has
otherwise deteriorated in quality. However, apparently the FASB wants the write
down to NRV to take place even when the price movement downward is transitory
A departure from the cost basisof pricing the inventory is required when the
utility of the goods is no longer as greatas theircost of
inventory exceeds its net realizable value. Where there is evidence
that the utility of goods, in their disposal in the ordinary course of
business, will be less than cost net realizable value of inventory
is less than cost, whether due to physical deterioration,
obsolescence,
changes in price levels,
or other causes, the difference shall be recognized as a loss in
earnings in the period in which it occurs
of the current period.
This is generally accomplished by measuring inventory at the lower of
cost and net realizable valuestating such goods at a lower level
commonly designated as market.
August 2,
2014 message from Dennis Beresford
Bob,
The FASB’s simplification of the inventory
standard, I believe, is not much more than an effort to do away with an
outdated rule that has been misapplied in practice thousands of times over
the past sixty plus years. Most accountants have looked at the rule in a
very simplistic way: whether the cost is higher than the item can be sold
for at the balance sheet date. Complications like normal profit margins and
costs of disposal are taken into consideration, I’m sure, in very
sophisticated situations but the large number of items often held in
inventory, difficulty in determining normal profit margins, and many other
factors make LOCOM determinations quite problematic in most situations.
Unlike Tom who believes this is an assault on
users’ information needs, I think this is a ho hum matter. The answers are
not likely to differ greatly in most cases and it’s quite possible that most
companies will find that they just keep doing what they were already doing.
I don’t think an extensive basis for conclusions is needed when the Board
just wants to simplify what is essentially a mechanical process.
Denny
Jensen
Comment
Hence we have a difference of opinion between Denny Beresford and Tom Selling
about the FASB's July 15, 2014 inventory valuation proposal. I won't comment
further since I'm still hung up on transitory price movements of non-damaged and
non-obsolete inventory items. I don't think inventory should be written down for
transitory price declines, but this is not source of the disagreement between
Denny and Tom.
Maybe the
AECM can shed more light on these issues.
September 2, 2014 reply from
Barbara Scofield
No one has yet mentioned the
financial statement impact of lower of cost or net
realizable value.
Inventory has a value that is the same
OR HIGHER under lower of cost or net realizable value than
it has under current GAAP using lower of cost or market with
the three measures of market value -- replacement cost, net
realizable value, or net realizable value less normal
profit.
When inventory is written down to net
realizable value, and assuming that the inventory is sold at net
realizable value, then the write down is limited and no gross
profit is recognized at the time of sale.
When inventory is written down to replacement
cost with bounds of net realizable value and net realizable value
less normal profit, then inventory may be written down below net
realizable value, and some gross profit is recognized at the time of
sale.
The same total profit is recognized in both cases,
but using lower of cost or net realizable value, income is recognized
sooner.
So the change to lower of cost or net realizable
value fits into the trend to ignore income statement effects and concentrate
on balance sheet effects. And income becomes less and less relevant for
financial statement users.
Barbara W. Scofield, PhD, CPA
Professor of Accounting
Washburn University -- HC 311L
Topeka, KS 66621
785-670-1804 (office)
There’s widespread and justifiable concern over a
dearth of great ideas, risky innovation, and progressive advances being
produced by corporate America. Apps and widgets don’t have the impact of
electricity, steam, or the PC. (Taco Bell’s Biscuit Taco doesn’t count.)
But right now, a storied American corporation is
embarking on a huge, all-in, Cortés-burning-the-ships gamble. And it could
have a significant impact on the industry that is both America’s largest
manufacturing sector and its largest retailing sector: autos.
The company is Ford, which hasn’t gotten nearly
enough credit for its remarkable, bailout-avoiding turnaround. (Go read
Bryce Hoffman’s book about it, American Icon.) And the gamble involves
transforming its highly popular F-150 pickup truck into a vehicle made
largely out of aluminum.
When it comes to sustainability, big car companies
have been tinkering around the edges in various ways: with a small-batch
all-electric car, with hybrids, by improving engines. That’s all to the
good. The fleet of cars sold in August got 25.8 miles per gallon, a record.
But to really move the needle on emissions and efficiency, you need to
produce large numbers of gas guzzlers that rack up lots of miles more
efficient. I wrote last week on how Proterra is trying to do this on a small
scale with all-electric buses.
In the coming months, however, Ford is set to do it
with the F-150. Month in, month out, the F-150 is the best-selling vehicle
in the U.S—and has been for the last three decades. In August alone, Ford
sold 68,109 F-150s. It has sold nearly 500,000 so far this year. The F-150
by itself accounts for more than 4 percent of all vehicle sales.
The Big Three have been rushing to make pickups
more fuel-efficient, in part to comply with incoming fuel standards, and in
part to gain a competitive advantage. They’ve had success in small doses.
Chrysler sells a diesel-powered Ram that gets 28 miles per gallon on the
highway, and some models of the Chevrolet Silverado can get up to 24,
according to EPA estimates. But those are niche offerings, accounting for
only a small portion of overall sales. Ford is trying to change the game.
The idea of using greater amounts of lightweight
aluminum to build cars isn’t exactly new, says Peter Friedman, the
self-described “aluminum guy” who manages the manufacturing research
department at Ford’s innovation center. Several years ago, as the company
looked ahead to how it could keep improving its pickups, it became apparent
that making the vehicles lighter was the best option—and the best way to
make them lighter would be to swap out steel for aluminum wherever possible.
Ford had used aluminum—which is about one-third as
dense than steel—in prototypes, and had owned Jaguar back when it made an
aluminum-based model. But switching over entirely would be a long process.
There’s plenty of bauxite, the raw material from which aluminum is derived,
but the supply capacity to produce huge volumes of automotive aluminum
simply didn’t exist in 2010. “The other big part is the changes to our
production system,” Friedman says. “We have 100 years or more of making
steel vehicles: stamping, framing line, welding a body structure together.
Many of these processes had to change.”
The 2015 F-150, the result of these efforts, goes
on sale later this year. It will look similar to previous year’s models,
only much lighter. The frame is still steel, but the box (the cab, the front
end, the bay) is almost all aluminum. That shift alone saves about 450
pounds in weight. Ford is compensating for aluminum’s lower density by
making the panels thicker. But there’s more to the story. If the body weighs
less, then everything else—the springs, the frame, the engine—can weigh
less. The frame, for example, uses 65 fewer pounds of steel. Thanks to this
compounding effect, the 2015 F-150 will weigh some 700 pounds less than
prior models. (The 2014 version weighs about 5,000 pounds.)
Lower weight translates into higher fuel
efficiency: A rule of thumb holds that a 10 percent reduction in weight
leads to a 3 percent increase in fuel economy, assuming nothing else
changes. But there are bigger gains to be had.
Thanks to the lower weight, these trucks can
generate a higher level of pulling power with a smaller, more efficient
engine. In the past few years, Ford has already integrated its EcoBoost
engine (which was funded in part by a $5.9 billion Department of Energy
loan) into the F-150.
In August about 45 percent of the F-150s sold had
3.5-liter EcoBoost engines. For 2015, Ford will offer as an option a more
efficient 2.7-liter EcoBoost with start-stop technology, which shuts off the
engine while in neutral.
Combined, the materials and the smaller engines can
make a big difference. Ford isn’t making concrete promises about mileage
yet, and the EPA has yet to weigh in. But analysts are projecting that the
F-150 could get up to 27 or 28 miles per gallon on the highway, a
significant increase from the 21 or 22 miles per gallon that 2014 F-150s
get.
Beyond the prospect of a huge increase in gas
mileage, several things are noteworthy about this effort. First, these are
work vehicles. And Ford is promising that the aluminum pickups will be just
as tough, durable, and able to pull loads as the steel-based ones they’re
replacing, all without corroding or rusting.
Second, unlike hybrids or the Tesla, the F-150
isn’t a premium product aimed at the high end of the market. The basic F-150
XL will have a base price of $25,420 in 2015, only $395 more than the 2014
version, or an increase of just 1.6 percent. The 2.7-liter EcoBoost engine
costs an extra $495.
Third, beyond avoiding the use of millions of
gallons of gasoline, an aluminum pickup truck can make other meaningful
contributions to sustainability. Compared with steel, aluminum can more
easily be recycled and reused.
Fourth, there’s the question of scale. Ford has
chosen to go aluminum on all versions of its highest-selling product, which
is made at the River Rouge plant in Michigan and a second plant in Kansas
City. This is not a test. “We have stopped production of the steel vehicle
at the Rouge, and won’t make it again,” Friedman says.
Jensen Comment
I think this is a useless ranking because "doing business" can be defined in so
many ways from production to sales to financing to the personal lives, numbers,
and skills of local workers. Uncertainty for the future must also be
factored in when "doing business" entails capital investment and relocation of
key workers.
For example the second-highest-ranked nation above, Hong Kong, is also the
most uncertain nation given the conflicts that erupted in 2014 between Hong Kong
and its parent mainland China. Investment and relocation decisions are much more
risky in Hong Kong's changed business climate.
New Zealand, Denmark, Norway, and Iceland may be good sales markets but these
high-welfare nations are not noted for motivated or skilled labor. Also
relocation costs can be very high in terms of personal income taxes and real
estate prices in these nations.
Ireland carries the baggage of being in the Eruozone. Both the United Kingdom
and Ireland carry the advantages and disadvantages of being in the troubled
European Union --- troubles ranging from immigration unrest to carrying of high
unemployment nations like Greece, Italy, Spain, and Portugal. The EU is
threatening to take some of the tax advantages of Ireland out of the picture.
There are also business uncertainties for USA companies doing business amidst an
unfriendly EU attitude to USA companies. Exhibit A comprises the huge fines of
high tech companies (e.g., Google and Microsoft) for anti-trust "violations."
The United Kingdom more than any other European Nation is troubled with
Jihadist unrest and terrorism threats that could become more focused on
businesses. South Korea faces the faces enormous problems of bordering an insane
nuclear-armed North Korea.
The USA has the highest corporate tax rates and the most complicated system
for avoiding taxes. The sales markets are great in the USA, but many
corporations are seeking to reduce USA tax obligations and labor costs with
relocations of production in other places like Mexico and Asia. The USA also is
probably the most litigious nation with over 80% of the tort lawyers of the
world.
About all that can be said for the top 10 nations above is that they are more
politically stable and enforce contracts better than most of the other 183
nations, particularly the many nations having civil strife, massive corruption,
violent gangs, revolution, and very militant labor unions that scare the
bejeebers out of companies thinking about production investments. Exhibit
A is Venezuela. Exhibit B is Bolivia.
Perhaps the greatest advantage of Singapore is its stability and near-absence
of corruption. But it's too small to be compared to a potential sales market
like China and India. China could become the business center of the world if it
could rid itself of massive corruption. The same can be said about India. If the
BRIC nations (Brazil, Russia, India, and China) could become less corrupt than
the USA, Canada, Australia, and the EU the world of commerce would become almost
totally dominated by the BRICs.
But the BRICs will flounder as long as they continue to be inflicted to
massive corruption. None of the BRICs made the 2014 top 10 list shown above.
Teaching Case on SEC Filings
From The Wall Street Journal Accounting Weekly Review on September 19, 2014
TOPICS: SEC, SEC Filings, Securities and Exchange Commission
SUMMARY: Every year, SEC lawyers and accountants review several
thousand of the more than half-million documents that companies file with
the agency. And while they are primarily on the prowl for accounting
inconsistencies and breaches of securities regulations, they also chase down
typos, sentence fragments, jargon, puffery and sloppy punctuation. In 2013
alone, the securities industry's style police sent nearly 8,800 letters to
more than 4,600 companies, according to LogixData, which analyzes SEC
filings. The letters, which eventually become public, contained more than
66,000 questions, most seeking fuller disclosure or better adherence to
accounting rules. But many would have been right at home in freshman
English.
CLASSROOM APPLICATION: This is an interesting article that we can
use when discussing the various SEC filings.
QUESTIONS:
1. (Introductory) What is the SEC? What is its purpose and areas of
authority?
2. (Introductory) What are some of the filings required by the SEC?
What is reported in each of those filings? Who uses that information?
3. (Advanced) What does the article report about the SEC
requirements? Why is the SEC particular about these requirements?
4. (Advanced) What accounting information is reported in SEC
filings? What accounting information is in financial statement form or in
numbers/dollars? What accounting information is in written form? What is the
value of each of these forms of information?
5. (Advanced) What is "plain English"? Why would the SEC be so
interested in its use? Why is it valuable? What is the alternative to plain
English? Why would something other than plain English be used?
Reviewed By: Linda Christiansen, Indiana University Southeast
After combing through a 19,974-word filing for a
securities offering, Securities and Exchange Commission senior counsel
Catherine Gordon had some guidance for the company that drafted it.
"In the second paragraph, add a comma," she wrote
to an attorney for the trust, sponsored by Incapital LLC, in December, "to
improve readability."
Meet the stock market's punctuation police.
Corporate securities filings are plagued by some of the world's most
impenetrable prose, but it isn't for lack of effort. Every year, SEC lawyers
and accountants review several thousand of the more than half-million
documents that companies file with the agency. And while they are primarily
on the prowl for accounting inconsistencies and breaches of securities
regulations, they also chase down typos, sentence fragments, jargon, puffery
and sloppy punctuation.
Making sure corporate disclosures pass muster falls
to the SEC's 350-member Corporation Finance division—Corp Fin in the
trade—which reviews every public company's primary filings at least once
every three years.
Last year alone, the securities industry's style
police sent nearly 8,800 letters to more than 4,600 companies, according to
LogixData, which analyzes SEC filings. The letters, which eventually become
public, contained more than 66,000 questions, most seeking fuller disclosure
or better adherence to accounting rules. But many would have been right at
home in freshman English.
SEC staffers asked a brewer to provide the volume
of a barrel, a wedding organizer to define "marriage-seeking profiles,"
racing companies to describe their horses with complete sentences, a
biopharmaceutical maker to explain aplastic anemia and an annuity company to
punctuate the end of a sentence.
In reply, they received nearly 8,700 letters
containing more than 67,000 answers and proposed revisions. Incapital added
the comma and agreed to additional changes prompted by 19 other queries in
the letter from Ms. Gordon and her colleagues, including requests for more
detail about investment practices and references to the "economic
environment."
The SEC declined to comment on specific letters or
to make staffers who sent them available for comment.
"Please use a readable type size throughout,"
senior staff attorney Kathryn McHale wrote First Internet Bancorp INBK
+0.44% in October after it filed to sell shares. "The summary selected
financial data beginning on page 6 is too small."
The bank promised to increase the font size, though
subsequent filings continued to use 8-point type for the numbers. Most of
the rest of the text appears in 13-point type.
First Internet said it used small type to fit
figures for seven financial periods in the table. The company uses larger
type where possible, and online filings mean readers can zoom in,
spokeswoman Nicole Lorch said. "It was not our intention to obfuscate
financial data," she said.
Some inquiries get technical. Pamela Long, one of
Corp Fin's assistant directors, questioned Technology Applications
International Corp. , a marketer of water purifiers and cosmetics based in
Aventura, Fla., about this phrase: "rotatable perfused time varying
electromagnetic force bioreactor."
She asked the company to explain what exactly it
was, along with "how this enhances the product, if at all."
Technology Applications proposed a revision: "In
use, the rotatable perfused time varying electromagnetic force bioreactor
supplies a time varying electromagnetic force to the rotatable perfusable
culture chamber of the rotatable perfused time varying electromagnetic force
bioreactor to expand cells contained therein."
Ms. Long wasn't satisfied.
"The revised disclosure uses a number of terms that
are unclear to the reader and appear to be industry jargon," she wrote,
asking the company to revise.
The company's next revision—with a color
illustration—mostly passed muster: The device is designed to grow
more-natural cell cultures. But Ms. Long remained concerned by language
saying the device was "sponsored" or "managed" by the National Aeronautics
and Space Administration.
"As currently drafted, the disclosure suggests that
NASA is actively involved in the process of making the cosmetics," she wrote
in January 2013.
The company now says in its filings that the device
was "developed and patented" by NASA and a private firm.
John Stickler, vice president at Technology
Applications, said the company expected some back and forth with the SEC
over its share registration, though the extent came as a bit of a surprise.
"The process got a little old after a while when you kept reiterating this
is how it works, this is how it works," said Mr. Stickler.
Most of Corp Fin's inquiries tackle tougher topics.
But simplifying language to be better understood by investors is also a
serious goal.
Former SEC Chairman Arthur Levitt made clarity a
career mission, prompting the agency in 1998 to publish an 83-page "Plain
English Handbook" that still circulates today.
"What we are getting to is clear and concise
disclosure that people can understand," said Shelley Parratt, Corp Fin's
deputy director for disclosure operations.
Continued in article
Teaching Case on Tax Increases
From The Wall Street Journal Accounting Weekly Review on September 19, 2014
SUMMARY: Many investors will see spikes in income this year as a
surge in corporate deals generates unexpected payouts. That could trigger a
surprising spike in their tax rates, too. The U.S. tax code rescinds tax
benefits and adds surtaxes for higher earners, typically those with incomes
of more than $150,000 a year. These are essentially backdoor tax increases,
and the effects can vary greatly. Investors who are at risk should run their
individual numbers or consult a professional while there is still time to
make moves this year that could soften the blow.
CLASSROOM APPLICATION: This article discusses various "backdoor"
tax increases and can be used for those topics, as well as general tax
planning for individuals.
QUESTIONS:
1. (Advanced) What is the purpose of this article? What does the
article mean by "backdoor" tax increases? How do those differ from other tax
increases?
2. (Introductory) The article mentions inversions. What are those
and why are they relevant to the topic of the article?
3. (Advanced) The article notes that taxpayers with a certain
income range will experience the greatest tax impact from inversions and
other corporate deals. What is that income range? Why will that group
experience the greatest impact?
4. (Advanced) What is the alternative minimum tax? What was its
original purpose? How would the AMT affect taxes on capital gains?
5. (Advanced) What is the net investment income tax? To what type
of income does it apply? At what income levels does it apply? How can a
taxpayer plan to minimize this tax?
6. (Advanced) What is the personal exemption phaseout? To whom does
it apply? How can it be minimized?
7. (Advanced) What is the Pease limitation? What is its impact on a
tax liability?
Reviewed By: Linda Christiansen, Indiana University Southeast
Profits From 'Inversions' and Other Deals Could Trigger Alternative Minimum
Tax, Exemption Phaseouts and More on 2014 Returns
Many investors will see spikes in income this year
as a surge in corporate deals generates unexpected payouts. That could
trigger a surprising spike in their tax rates, too.
The U.S. tax code rescinds tax benefits and adds
surtaxes for higher earners, typically those with incomes of more than
$150,000 a year. These are essentially backdoor tax increases, and the
effects can vary greatly. Investors who are at risk should run their
individual numbers or consult a professional while there is still time to
make moves this year that could soften the blow, experts say.
It has been a banner year for mergers, with U.S.
deal activity up 58% by value year to date over the same period in 2013,
according to Dealogic. The takeovers of Micros Systems, Hillshire Brands and
Furiex Pharmaceuticals will include taxable cash payments to shareholders.
Another dozen or more firms, including AbbVie, ABBV
+0.45% Medtronic MDT 0.00% and Burger King Worldwide, BKW +0.32% are
planning "inversions," where U.S. companies merge with foreign firms and
move to lower-tax countries. Investors holding stock in taxable accounts—as
opposed to a tax-sheltered retirement plan—often get a windfall due to an
inversion because it is treated as a sale, along with a surprise tax bill.
In addition, energy giant Kinder Morgan KMI -0.46%
has announced a reorganization that could generate income for many holders
of units of Kinder Morgan Energy Partners, KMP +1.89% its widely held master
limited partnership.
The result could be that some income and capital
gains could be taxed at substantially higher rates.
Chris Hesse, an accountant at CliftonLarsonAllen in
Minneapolis, researched how backdoor tax increases change the tax rates on
investment income for a typical family of four as long-term capital gains
are added to an income of $80,000 of wages and $20,000 of interest.
He found that a wide swath of people with a nominal
tax rate of 15% on long-term gains actually owed nearly 28% on the gains.
The impact is likely to be most significant for
people with incomes between $150,000 and $500,000, says Mr. Hesse. When the
typical family's income rose above $500,000, the actual rate on long-term
gains flattened to about 24%, he found.
Taxpayers who are most affected by these backdoor
tax increases sometimes have the most room to avoid them, if they act in
time, says Scott Kaplowitch, an accountant at Edelstein & Co. in Boston. He
recently advised a client with a deal-related windfall that waiting to take
deferred compensation until next January will cut his tax rate on the income
by 10 percentage points, as the client will have retired by then and be in a
lower bracket.
Here's a brief guide to the main backdoor tax
increases and some ways to limit the resulting bills.
Alternative minimum tax. The AMT was originally
imposed to keep the wealthy from taking too many tax breaks, although now it
falls most heavily on the affluent. It works by eliminating certain
benefits, such as the personal exemption and state and local tax deductions,
and limiting the value of others.
While capital gains aren't penalized by the AMT,
having a high proportion of long-term capital gains to ordinary income can
trigger the levy, says Mr. Kaplowitch.
So a taxpayer who plans to make charitable
donations over several years might be able to lower the capital gain and
avoid the AMT by making several years' worth of gifts of appreciated stock
to favorite charities all at once.
If the AMT is unavoidable, however, it might make
sense to postpone donations to a future year, when they will be more
valuable—and to accelerate state tax payments into this year to reduce the
likelihood of triggering the AMT again next year.
Net investment-income tax. This flat levy of 3.8%
applies to the amount of net investment income, including dividends, capital
gains and interest, that a taxpayer has above a certain threshold. It is
pegged at $250,000 of adjusted gross income, or AGI, for most married
couples and $200,000 for most singles, and it isn't adjusted for inflation.
While the 3.8% surtax typically doesn't apply to
quarterly payouts made to investors by master limited partnerships such as
Kinder Morgan's, experts say it will apply to the income generated by
reorganizations such as the one Kinder Morgan plans.
The best way to limit this levy is to keep AGI
below the threshold. Itemized deductions such as mortgage interest don't
help, but putting income into a tax-deductible retirement plan or deferring
income to a future year could. Making a charitable gift of appreciated
inversion stock could also reduce the portion of a long-term gain that
raises AGI.
Personal Exemption Phaseout. The PEP restriction
takes effect at $305,050 of AGI for most married couples and $254,200 for
most single filers.
PEP rescinds the value of the $3,950 deduction that
is allowed for each family member. It disappears entirely at $427,550 of AGI
for most couples and $376,700 for most singles—if the taxpayer isn't subject
to the AMT, which disallows the deduction entirely. For that reason, PEP is
more likely to affect people with higher incomes from low-tax states who
aren't caught by the AMT.
The best way to avoid PEP, say experts, is to keep
AGI below the threshold, using the same methods that can work for the net
investment income tax.
Pease limitation. This provision takes effect at
the same threshold as PEP. It reduces most itemized deductions, such as
those for mortgage interest, state and local taxes, and charitable
donations, by 3% of the amount over the threshold—although it can never take
away more than 80% of a taxpayer's itemized deductions.
Continued in article
Teaching Case on Taxation of
Meals
From The Wall Street Journal Accounting Weekly Review on September 5, 2014
SUMMARY: Putting a new focus on the issue, the IRS and U.S.
Treasury Department has included taxation of "employer-provided meals" in
their annual list of top tax priorities for the fiscal year ending June
2015. The agencies said they intend to issue new "guidance" on the matter,
but gave no specifics about timing or what the guidance would say. In
general, employer-provided meals - beyond those served at the occasional
business meeting - are a taxable fringe benefit, similar to personal use of
a company car or the value of employer-paid life-insurance coverage above
the IRS threshold of $50,000. But it is a complex area of tax law, and there
are exceptions. For example, meals can remain untaxed if they are served for
a "noncompensatory" reason for the "convenience of the employer."
CLASSROOM APPLICATION: Students may have heard about the amazing
benefits tech employers in Silicon Valley offer to employees - free food in
particular. For that reason, this is a great article to use when covering
the taxation of fringe benefits.
QUESTIONS:
1. (Introductory) What are fringe benefits? What are the details of
the fringe benefits offered by Silicon Valley employers?
2. (Advanced) What are the tax rules regarding employer-provided
meals? What are the exceptions? Why do you think the rules are drafted this
way?
3. (Advanced) Should employees be taxed for the meals provided by
tech employers? Do any of the exceptions apply? What options do employers
have in managing this situation?
4. (Advanced) Why is the IRS beginning to focus on
employer-provided meals? Do you think the IRS will win this issue? What
other enforcement issues should the IRS be addressing?
5. (Advanced) What other benefits are taxable? Which ones are not?
What is the reasoning behind taxing some fringe benefits and not others?
Reviewed By: Linda Christiansen, Indiana University Southeast
There is a grumpy new face in line at Silicon
Valley's lavish freebie cafeterias: the Internal Revenue Service.
Staffers at technology companies such as Google
Inc., GOOGL +0.24% Facebook Inc. FB -0.20% and Twitter Inc. TWTR -1.70% long
have enjoyed free gourmet meals, courtesy of their employers. The groaning
buffets, in-house pizza joints, and kitchens stocked with organic produce
are an intrinsic part of the culture in much of Silicon Valley, encouraging
both collaboration and longer work hours.
The IRS, arguing that these freebies are a taxable
fringe benefit, has given new attention to the issue in recent months during
routine audits of some companies, tax lawyers said. When employers haven't
been withholding taxes related to the meals, the IRS increasingly has sought
back taxes that can amount to 30% of the meals' fair-market value, the
lawyers said.
In another sign of a new focus on the issue, the
IRS and U.S. Treasury Department last week included taxation of
"employer-provided meals" in their annual list of top tax priorities for the
fiscal year ending next June. The agencies said they intend to issue new
"guidance" on the matter, but gave no specifics about timing or what the
guidance would say.
"I suspect this is going to be guidance on these
free cafeterias, that the benefit has got to be included in income," said
Anne G. Batter, an employment-tax attorney at Baker & McKenzie in
Washington.
An IRS spokesman declined to comment.
Tax lawyers expect some employers will fight the
IRS over the matter, and said the issue is likely to be decided in the
courts. Any broad IRS crackdown could spur complaints about petty government
interference with the culture of a crucial industry.
But allowing free meals to go untaxed, critics say,
distorts the economy and gives some employers an unfair edge.
In theory, individual employees could be dunned for
back taxes on the free meals. In practice, the IRS generally tries to
collect from employers, who are liable for failing to withhold taxes on any
taxable income.
Google, Facebook and Twitter—three companies known
for their food perks—declined to comment.
IRS interest in the free-meals issue ticked up last
year, after The Wall Street Journal published an article focusing on whether
the food should be considered a taxable benefit, said Thomas M. Cryan Jr. ,
a Washington employment-tax attorney at Buchanan Ingersoll & Rooney PC.
"It's definitely an area the IRS is auditing," said
Mr. Cryan, who said two of his clients are in the midst of IRS audits over
this matter.
Mr. Cryan said he has been told by IRS agents that
the meals-tax push stems from a national directive by senior officials.
In general, tax experts said, employer-provided
meals—beyond those served at the occasional business meeting—are a taxable
fringe benefit, similar to personal use of a company car or the value of
employer-paid life-insurance coverage above the IRS threshold of $50,000.
But it is a complex area of tax law, and there are
exceptions. For example, meals can remain untaxed if they are served for a "noncompensatory"
reason for the "convenience of the employer."
The exception generally applies to workers in
remote locations, such as oil rigs, or in professions where reasonable lunch
breaks aren't feasible. A Las Vegas casino won in court over the issue by
arguing that stringent security made it impractical for employees to eat
outside the premises.
Some lawyers argue that, in many cases, corporate
free-meal programs fit under the "convenience of the employer" test.
"Look at the time savings," said Mary B. Hevener,
an employee-benefits attorney at Morgan, Lewis & Bockius LLP in Washington.
"If your employees are able to eat lunch and get
back to their desks in 20 or 30 minutes, that's a big time savings," she
added. "The food is a lot healthier in many cases. And maybe you don't want
your employees running around in other eateries talking business."
Ms. Hevener wouldn't discuss her clients, but said
"examining agents are not fairly assessing what the regulations and
legislation say" in this area.
Even if tax-free meals eventually go away, that
won't necessarily spell the demise of Silicon Valley's no-cost buffets.
Marianna Dyson, an attorney at Miller & Chevalier in Washington, said she
knows of at least one Silicon Valley company that provides free food, but
"grosses up" its employees, paying them extra to cover additional taxes owed
on the perk.
Teaching Case on Pending Lease
Accounting Rule Changes
From The Wall Street Journal Accounting Weekly Review on September 5, 2014
SUMMARY: U.S. and international accounting-rule makers are edging
closer to completing a decade-long effort to overhaul lease accounting
rules. The rules, which could be issued in 2015, threaten to bring roughly
$2 trillion of off-balance-sheet leases onto corporate books. But adding
assets and liabilities for store leases, airplanes and the like could force
companies to renegotiate the terms of their loans with lenders. Banks and
lenders often require companies to maintain covenants, such as a specific
debt-to-equity ratio, fixed-asset ratio or earnings metric, which could all
be thrown out of whack by such a significant accounting change.
CLASSROOM APPLICATION: This is an interesting article about the
changes to lease accounting because it highlights an important ripple
effect: calculations for debt covenants will be affected. This is important
to note for students that any change to accounting rules can change the
financial statements and any corresponding financial statement analysis
calculations. These ripple effects can cause problems for the firms and
should be anticipated and addressed.
QUESTIONS:
1. (Introductory) What changes have been proposed for accounting
for leases? Why are rule-makers working on these changes?
2. (Advanced) What are some of the ripple effects resulting from
the changes to the lease rules? More specifically, what is the impact on
calculations for debt covenants?
3. (Advanced) How should lenders react? Should they adjust their
calculations? How should they approach enforcing existing contract
requirements?
Reviewed By: Linda Christiansen, Indiana University Southeast
Percentage of global companies with bank-debt
covenants potentially affected by lease accounting changes
U.S. and international accounting-rule makers are
edging closer to completing a decadelong effort to overhaul lease accounting
rules. The rules, which could be issued next year, threaten to bring roughly
$2 trillion of off-balance-sheet leases onto corporate books.
But adding assets and liabilities for store leases,
airplanes and the like could force companies to renegotiate the terms of
their loans with lenders. Banks and lenders often require companies to
maintain covenants, such as a specific debt-to-equity ratio, fixed-asset
ratio or earnings metric, which could all be thrown out of whack by such a
significant accounting change.
Some 50% of global companies have business loans
with debt covenants that could require them to repay a loan if they break
any covenants, according to a survey of more than 2,000 directors and
C-level executives by accounting firm Grant Thornton International Ltd. But
only about 8% of those companies currently believe that putting leases on
their balance sheet will affect their compliance with bank covenants.
"Many companies are in for a big surprise when this
comes out and they have to go to the bank," said Ed Nusbaum, chief executive
of Grant Thornton International. "They need to start talking to their
bankers."
In North America, about 75% of the executives
polled said their loans could be recalled if they break this type of
covenant, but less than 5% of executives thought the lease accounting change
would affect them.
The American Bankers Association has been pushing
rule makers to build a long transition period into the new rules, so that
they wouldn't take effect until at least 2018.
"There has to be a huge amount of education for
loan officers, who have to start figuring out what the right ratios are and
what they will have to adjust," said Michael Gullette, vice president of
accounting and financial management at the ABA.
• The FASB decided that repurchase options
exercisable at fair value would not preclude sale accounting for sale and
leaseback transaction s involving non - specialized underlying assets that
are readily available in the marketplace .
• The FASB decided that l essees that are not
public business entities could make an accounting policy election to use the
risk - free rate for the initial and subsequent measurement of lease
liabilities. This is consistent with the Board’s 2013 proposal.
• The Board affirmed its 2013 proposal to eliminate
today’s accounting model for leveraged leases but decided that leveraged
leases that exist at transition would be grandfathered.
• The Board also affirmed its 2013 proposal
for lessees and lessors to account for related party leases on the basis of
the legally enforceable terms and conditions of the lease .
Overview
The Financial Accounting Standards Board (FASB
or Board ) continued to redeliberate its 2013 joint proposal 1 t o put
most leases on lessees’ balance sheets . At last week’s FASB - only
meeting, the Board made more decisions to clarify the proposed guidance
on the accounting for sale and leaseback transactions. The Board also
affirmed its 2013 proposed decisions about the discount rate for lessee
entities that are not public business entities (PBE) , the accounting
for leveraged leases and the accounting for related party leasing
transactions. The Board’s latest decisions, like all decisions to date,
are tentative. No. 201 4 - 333 September 2014 To the Point FASB —
proposed guidance
SUMMARY: Corporate managers will have to make more uniform
disclosures when there is substantial doubt about their business' ability to
survive, according to the Financial Accounting Standards Board. The FASB
updated U.S. accounting rules, effective by the end of 2016, to define
management's responsibility to evaluate whether their business will be able
to continue operating as a "going concern," and make relevant disclosures in
financial statement footnotes. Previously, there were no specific rules
under U.S. Generally Accepted Accounting Principles and disclosures were
largely up to auditors. Corporate executives had the option to make any
voluntary disclosures they felt relevant.
CLASSROOM APPLICATION: This is a good article to discuss going
concern, notes to the financial statements, and FASB, as well as
management's responsibility in financial reporting.
QUESTIONS:
1. (Introductory) What is FASB? What is its function? What is GAAP?
Why is GAAP used in accounting?
2. (Advanced) What does the concept "going concern" mean? Why is it
important? What kind of disclosures is FASB requiring? Who is required to
make the disclosures? Why are these parties included in the requirement?
3. (Advanced) In general, what is included in the notes to
financial statements? Why are notes required? Who uses the notes and how are
they used? Please give some examples of information regularly included in
the notes.
4. (Advanced) What is the benefit of this new rule? How can this
information be used? Are there other ways besides a note that someone could
access this information?
Reviewed By: Linda Christiansen, Indiana University Southeast
Corporate managers will have to make more uniform
disclosures when there is substantial doubt about their business’ ability to
survive, the Financial Accounting Standards Board said Wednesday.
The FASB updated U.S. accounting rules, effective
by the end of 2016, to define management’s responsibility to evaluate
whether their business will be able to continue operating as a “going
concern,” and make relevant disclosures in financial statement footnotes.
Previously, there were no specific rules under U.S. Generally Accepted
Accounting Principles and disclosures were largely up to auditors. Corporate
executives had the option to make any voluntary disclosures they felt
relevant.
The FASB first issued a proposal at the peak of the
financial crisis in 2008, but debate and revisions delayed the final
standard, which didn’t go up for a vote until May.
Supporters of the changes have argued that
corporate managers have better information about a company’s ability to
continue financing their operations than auditors. The
updated rule will force executives to disclose serious risks even if
management has a credible plan to alleviate them, for example.
Information currently disclosed by companies can
vary significantly. Only about 40% of companies that filed for bankruptcy in
the past two decades have explicitly disclosed the possibility that they
could cease to operate before running into trouble,
according to a study this month from Duke
University’s Fuqua School of Business.
Teaching Case on Consolidation
and Tax Strategy
From The Wall Street Journal Accounting Weekly Review on September 5, 2014
SUMMARY: Energy giant Kinder Morgan Inc. is pursuing a
reorganization that could trigger surprise tax bills for investors in its
two publicly traded master limited partnerships: Kinder Morgan Energy
Partners and El Paso Pipeline Partners. One of the partnerships has
generated an average return of nearly 18% annually over the past five years
and 12% over the past 10 years. The potential obligations to Uncle Sam,
however, are a reminder of the complex tax issues that come with MLP
investments. That is especially true when shares-or units, as they are
known-are sold.
CLASSROOM APPLICATION: This article explains what is happening in
the reorganization of these partnerships and focuses on the tax impact on
the owners.
QUESTIONS:
1. (Introductory) What are the facts of the Kinder Morgan situation
discussed in the article? What is Kinder Morgan planning? Why is it making
the change?
2. (Advanced) What are master limited partnerships (MLPs)? What is
the tax treatment of an MLP's income? How is that information reported?
3. (Advanced) What are the tax advantages of MLPs? What is the tax
treatment when an investor sell units in an MLP? What does the article
indicate is the best tax planning for owners of MLPs? Why?
4. (Advanced) How will investors calculate tax liability for the
units sold through the reorganization?
Reviewed By: Linda Christiansen, Indiana University Southeast
Energy giant Kinder Morgan Inc. KMI +0.23% is
pursuing a reorganization that could trigger surprise tax bills for
investors in its two publicly traded master limited partnerships: Kinder
Morgan Energy Partners KMP +0.34% and El Paso Pipeline Partners. EPB +0.53%
Investors long have cherished the hefty payouts
from MLPs, and the two partnerships—led by Richard Kinder, who also heads
Kinder Morgan—have done well. According to Chicago-based investment
researcher Morningstar, Kinder Morgan Energy Partners—the more widely held
investment—has generated an average return of nearly 18% annually over the
past five years and 12% over the past 10 years.
The potential obligations to Uncle Sam, however,
are a reminder of the complex tax issues that come with MLP investments.
That is especially true when shares—or units, as they are known—are sold.
Here is what is happening, and what taxpayers can do about it:
Why MLP taxes are different. Because MLPs are
partnerships and not corporations, they don't owe federal income tax.
Instead, investors—who are technically members of the partnership—record a
proportional share of the partnership's income, depreciation, losses and
other items on their personal tax returns. Investors receive this
information in a document called a K-1.
Incorporating K-1 information into the investor's
tax return often takes far more time (or fees to tax preparers) than
reporting dividend information, experts say.
The reason many investors owe little to no tax each
year on MLP payouts is that most taxes are deferred until units are sold.
There are tax effects that accumulate over time, however. An important one
is that, unlike with dividends, MLP payouts reduce the investor's "cost
basis," the starting point for measuring income tax after a sale. The lower
the cost basis, the higher the taxable income.
When units are sold, there is a reckoning with the
Internal Revenue Service. The investor's cost basis is often much lower than
his purchase price, and some of his profit could be taxed at rates for
ordinary income, which are higher than capital-gains rates.
Many tax issues disappear if MLP investors hold
units until death, says Don Williamson, who heads the Kogod Tax Center at
American University. At death, no income tax on the MLPs is owed and heirs
get a fresh start—a cost basis equal to full market value at the date of
death.
"Death is the best tax planning for MLPs," Mr.
Williamson says.
Most Kinder Morgan MLP investors won't be able to
use this strategy. The coming reorganization counts as a taxable sale, with
investors slated to receive $10.77 in cash and 2.1931 shares of the new firm
for each Kinder Morgan Energy Partners unit they currently hold.
Continued in article
Teaching Case on Valuation
From The Wall Street Journal Accounting Weekly Review on September 12, 2014
SUMMARY: As a business partnership soured, hot heads got in the way
of a cold calculation: What is the value of Arizona Beverage Co., maker of
the popular Arizona iced tea? A New York State Supreme Court judge is set to
hear closing arguments in a four-year-old fight over the valuation, in which
Arizona's estranged co-founders have been as far apart as water in the
desert. One co-founder, who wants to be bought out, contends that Arizona is
worth between $3 billion and $4 billion. The other, who is willing to buy
out his former partner, argues Arizona's value is closer to $500 million.
Aside from wrapping up the messy business-divorce proceedings, a conclusion
in the case could pave the way for Coca-Cola Co. or another drinks company
to buy a stake.
CLASSROOM APPLICATION: This article is appropriate for a class that
covers the topic of business valuation.
QUESTIONS:
1. (Introductory) What are the facts of this case? Who is the
plaintiff and who is the defendant? What issue do the parties want the court
to decide?
2. (Advanced) What is a business valuation? Besides litigation,
what are other uses of business valuations? Why might a business want to
know its value?
3. (Advanced) What are some methods used to value a business? Which
of these might methods might be appropriate for use in this case?
4. (Advanced) Why are the parties so far apart with these valuation
amounts? Do each of the parties have a legitimate basis for the amount they
are proposing? Which is more likely to be correct?
5. (Advanced) What knowledge and skills are necessary to do
business valuations? What education and business experience would be
beneficial for someone interested in a career in business valuation? What
are the career opportunities?
Reviewed By: Linda Christiansen, Indiana University Southeast
As a business partnership soured, hot heads got in
the way of a cold calculation: What is the value of Arizona Beverage Co.,
maker of the popular Arizona iced tea?
On Thursday, a New York State Supreme Court judge
is set to hear closing arguments in a four-year-old fight over the
valuation, in which Arizona's estranged co-founders have been as far apart
as water in the desert. One co-founder, who wants to be bought out, contends
that Arizona is worth between $3 billion and $4 billion. The other, who is
willing to buy out his former partner, argues Arizona's value is closer to
$500 million.
Aside from wrapping up the messy business-divorce
proceedings, a conclusion in the case could pave the way for Coca-Cola Co.
KO -0.19% or another drinks company to buy a stake.
Nassau County, N.Y., Supreme Court Judge Timothy
Driscoll will be the one to determine how much co-founder Domenick Vultaggio
must pay co-founder John Ferolito to take full control. Depending on how
much the court values Mr. Ferolito's stake, Mr. Vultaggio might have to seek
outside investors for help. That could finally reopen talks between Arizona
and several beverage companies like Coke that are eager to grab a huge part
of the growing U.S. market for ready-to-drink tea.
Judge Driscoll has told both parties he will try to
issue a ruling by Columbus Day.
As young men, Messrs. Ferolito and Vultaggio, two
friends from Brooklyn, teamed up in 1971 to deliver beer around New York
City from a Volkswagen VOW3.XE -0.66% bus. Decades later, after seeing
Snapple teas fill up store shelves, they launched Arizona and its
Southwestern-inspired label motif in 1992, eventually taking it national and
unseating Snapple and several other brands owned by deeper-pocketed
companies.
Arizona had a 40% share of U.S. ready-to-drink tea
in 2013 by volume, ahead of PepsiCo Inc., PEP +0.93% which sells Lipton
through its joint venture with Unilever ULVR.LN -0.30% and had a 34% share,
according to industry tracker Beverage Digest. Snapple, now owned by Dr
Pepper Snapple Group Inc., DPS +0.56% had a 10% share.
Beverage Digest estimates annual U.S.
ready-to-drink tea sales to be around $6 billion.
The two founders have been feuding for years and
Mr. Ferolito has long stopped being involved in day-to-day operations,
moving to Florida.
Mr. Ferolito began looking at selling his stake in
Arizona roughly a decade ago, but was blocked by Mr. Vultaggio. An agreement
prevented either side from selling its stake without the other's consent.
The legal battle has featured plenty of fireworks.
Mr. Vultaggio's lawyers have accused Mr. Ferolito of trying to intimidate
Mr. Vultaggio at one point in the yearslong dispute by appearing at the
company with an armed former New York City detective. Nicholas Gravante, an
attorney for Mr. Ferolito, called the allegation "a complete fabrication.''
"Both sides have thrown a lot of grenades back and
forth. The court has shown absolutely no interest in that nonsense. This is
a valuation case,'' added Mr. Gravante, an attorney at Boies, Schiller &
Flexner LLP.
The case, which went to trial earlier this summer,
has produced about 5,000 pages of transcripts and thousands of pages in
exhibits, according to Louis Solomon, an attorney for Mr. Vultaggio.
Mr. Solomon, an attorney at Cadwalader, Wickersham
& Taft LLP, said Mr. Vultaggio has no intention of selling the company.
"He's not a seller. He's never been a seller,'' Mr. Solomon said, adding
that Mr. Vultaggio's children also are involved in the business.
But attorneys for both men acknowledge that
companies including Coke, Nestlé SA NESN.VX +0.28% and Tata Global Beverages
500800.BY -4.67% have approached Mr. Ferolito and Arizona in the past about
acquiring part or all of the company. The valuation court case, which began
in 2010, effectively killed such talks.
Coke and Nestlé declined Wednesday to comment on
any previous talks, or any potential interest in acquiring part or all of
Arizona if it becomes available. Tata, which is based in India, didn't
immediately return calls on Wednesday. The Wall Street Journal reported in
2007 that Coke and Arizona executives had held talks.
"If it is for sale, it would be a terrific deal for
Coke because it needs a much bigger North American tea business,'' said John
Sicher, publisher of Beverage Digest, adding tea should continue to grow
thanks to its "health and wellness aura.''
Coke's Fuze, Gold Peak and Honest Tea brands had a
5.5% share of the U.S. ready-to-drink tea market by volume last year,
according to Beverage Digest. Coke ended its Nestea partnership in the U.S.
with Nestlé in 2012.
Coke already has made two moves into caffeinated
drinks this year, buying minority stakes in countertop coffee maker Keurig
Green Mountain Inc. GMCR +1.16% and energy drink maker Monster Beverage
Corp. MNST -0.51%
Teaching Case on the
Globalization of IFRS: Allowing IFRS and Requiring IFRS are Two Different
Matters
From The Wall Street Journal Accounting Weekly Review on September 12, 2014
SUMMARY: The U.S., China, Egypt, Bolivia, Guinea-Bissau, Macao and
Niger don't allow their domestic publicly traded companies to use
International Financial Reporting Standards. In 106 countries, all or most
domestic public companies are required to report under IFRS. This article
provides data regarding the number of countries using IFRS and those that do
not.
CLASSROOM APPLICATION: Use this article when covering IFRS to show
the extensive use around the world.
QUESTIONS:
1. (Introductory) What is IFRS? Where is it used? What countries do
not use IFRS?
2. (Advanced) What set of standards does the U.S. use? Why does the
U.S. use those standards and not others? Does the U.S. offer any exceptions
to its required set of standards? Why or why not?
3. (Advanced) What is the status of IFRS in the U.S.? Do you think
it should implemented? Why or why not? Should it be implemented?
Reviewed By: Linda Christiansen, Indiana University Southeast
The
U.S., China, Egypt, Bolivia, Guinea-Bissau, Macao and Niger don’t allow
their domestic publicly traded companies to use International Financial
Reporting Standards.
In 106 countries, all or most domestic public
companies are required to report under IFRS, according to a review of 130
countries by the parent of the London-based International Accounting
Standards Board. Another 15 countries permit or require the use of IFRS at
least for financial-services companies.
For more than a decade, the IASB and the U.S.
Financial Accounting Standards Board have been working to align their
accounting rules. And while they hope to wrap up that project next year,
there is still disagreement.
Some U.S. investors worry that the expense of
moving U.S. companies to IFRS and adopting new approaches to inventory and
acquisition accounting, for example, wouldn’t yield sufficient benefit to
justify the cost.
It is unclear whether U.S. Securities and Exchange
Commission Chairman Mary Jo White and James Schnurr, the agency’s incoming
chief accountant, will take up the task of integrating IFRS and U.S.
generally accepted accounting practices.
Ms. White has made a priority to give more
direction on IFRS but didn’t say whether she would consider giving U.S.
companies an option to use international rules.
The U.S. allows about 500 U.S.-listed foreign
companies, such as HSBC Holdings HSBA.LN -0.21% PLC and Unilever ULVR.LN
-0.45% PLC, to report results solely according to IFRS. The IASB views that
exception as indication that the SEC accepts that IFRS accounting won’t harm
investors, said Paul Pacter, a former IASB member and now a consultant to
the board.
SUMMARY: Lately, regulators and standard setters have been renewing
their focus on disclosure effectiveness. Although SEC, FASB, and IASB
projects are in the early stages, their common goal of making comprehensive
improvements to the U.S. public company disclosure regime may increase their
likelihood of success. While views on how to achieve improvements may
differ, most seem to agree that the entire disclosure system is due - if not
overdue - for modernization.
CLASSROOM APPLICATION: This article about the SEC, FASB, and IASB
plans for disclosure effectiveness is appropriate for a financial accounting
or auditing class.
QUESTIONS:
1. (Introductory) What are the SEC, FASB, and IASB? What are their
purposes? How do they differ?
2. (Advanced) What disclosures are discussed in the article? In
general, what do these organizations plan to do to increase the
effectiveness of disclosures?
3. (Advanced) Please explain the details of the SEC's disclosure
effectiveness project and its other disclosure plans. What will these plans
add to financial reporting? Do you think these are good moves?
4. (Advanced) Please review SEC filings for a large public company
of your choice (available online). Were you able to understand the
information presented? What information is easy to find and understand? What
information is challenging to find or to understand? Having reviewed this
information, what suggestions do you have to improve access and readability?
5. (Advanced) What are FASB's plans regarding improvement of
disclosures? Why is FASB particularly important for financial reporting
purposes and information dissemination?
6. (Advanced) What is IASB considering? How could these changes
help companies and investors in the U.S.?
Reviewed By: Linda Christiansen, Indiana University Southeast
The call for modernizing and improving the public
company disclosure regime—whether in the name of combatting complexity and
“overload,” improving efficiency or effectiveness, or adapting to new
technology—is hardly new. Indeed, in the past decade alone, several
regulatory and standard-setting initiatives have included such broad goals.
But none of those efforts resulted in fundamental changes to the disclosure
system, in part because of competing agenda priorities and difficulties
achieving consensus on the specific nature of comprehensive changes.
Lately, however, regulators and standard setters
have been renewing their focus on disclosure effectiveness. SEC Commissioner
Kara Stein remarked in a May 2014 speech
that “[i]mproving disclosures is an important and
herculean task,” and certain projects at the SEC and at the FASB and IASB
have been gaining momentum. Although those projects are in the early stages,
their common goal of making comprehensive improvements to the U.S. public
company disclosure regime may increase their likelihood of success. While
views on how to achieve improvements may differ, most seem to agree that the
entire disclosure system is due—if not overdue—for modernization.
SEC Disclosure Effectiveness Project
A motivating factor in the SEC’s recent efforts to
improve disclosure effectiveness (known as its “disclosure effectiveness
project”) has been its concern that investors often struggle to find salient
information in registrants’ filings. In an October 2013
speech, SEC Chair
Mary Jo White questioned “whether investors need and [investors] are
optimally served by the detailed and lengthy disclosures about all of the
topics that companies currently provide in the reports they are required to
prepare and file with [the SEC].” And in a May 2014
speech, Ms. White
emphasized the importance of “full and fair disclosure [for the] capital
markets to thrive” and asked whether “the information companies are
currently required to disclose is the most useful information for investors
and whether [it] is being provided at the right time and in the right way.”
Further, in a January 2014
speech, Commissioner Daniel Gallagher noted his
observations that registrants often disclose matters that are generic,
outdated, redundant, and immaterial. He stated that “[t]oday’s mandated
disclosure documents are no longer efficient mechanisms for clearly
conveying material information to investors.”
The SEC’s recent focus on disclosure effectiveness
has also been prompted by Section 108 of the JOBS¹ Act, under which the SEC
was instructed to review disclosure requirements in Regulation S-K (which
contains many of the nonfinancial statement reporting requirements for SEC
filings), identify ways to update and modernize them for emerging growth
companies (EGCs), and submit a
report to Congress.
In its report (issued in December 2013), the SEC recommended seeking
disclosure improvements for all public companies, not just EGCs, even though
a more comprehensive study would take additional time.
With the SEC’s report serving as a springboard for
further action, Ms. White asked the staff to undertake a comprehensive
review of the disclosure requirements in Regulation S-K as well as those in
Regulation S-X (which contains requirements on the form and content of
financial statements included in SEC filings) and to make specific
recommendations. To achieve this objective, the SEC noted that it would
focus not only on eliminating outdated, redundant, and overlapping
disclosures but also on identifying topics for which investors may need
better or more information to make informed investment decisions. Remarking
on the need to reduce immaterial disclosures, Keith Higgins, director of the
SEC’s Division of Corporation Finance, noted in a March 2014
speech that “[u]nfortunately, there is no easy
answer or consensus on how to do so. What one person sees as overload,
another might very well see as important information for making an
investment or voting decision.”
SEC Review of Disclosure Content
In an April 2014
speech, Mr. Higgins explained that the SEC staff
will identify ways to improve the disclosure requirements in Regulations S-K
and S-X. The staff will analyze Regulation S-K as part of the first phase of
its disclosure effectiveness project, focusing “on the business and
financial disclosures that flow into periodic and current reports, namely
Forms 10-K, 10-Q, and 8-K, and, in one way or another, make their way into
transactional filings.” For example, the staff will consider eliminating
disclosure requirements that were originally created to fill a void in U.S.
GAAP but are no longer necessary. Further, the staff will:
Assess whether to update industry guides and
form-specific disclosure requirements and incorporate them into
Regulation S-K.
Consider the merits of permitting scaled
disclosures for certain issuers (e.g., smaller reporting companies or
EGCs).
Editor’s
Note: In her May 2014 speech, Ms. White indicated that since
investors have a significant interest in increased transparency into audit
committee activities, she has asked the SEC staff to consider, separately
from the disclosure effectiveness project, whether audit committee reporting
requirements and reports can be improved. Commenting generally on how the
SEC staff will prioritize its ongoing review, Mr. Higgins noted in his April
2014 speech that the staff’s evaluation of proxy disclosures would take
place in a “later phase of the project.”
In addition, the staff plans to study whether the
benefits associated with requirements in Regulation S-X outweigh their costs
to preparers. For example, the staff will review:
A registrant’s obligation to provide other
entities’ separate financial statements in registration statements,
periodic filings, or both.²
The need for registrants to provide “recasted”
financial statements after a retrospective change is adopted.³
Overlap in the disclosures required by
Regulation S-X and U.S. GAAP.
SEC Review of Disclosure Format
Mr. Higgins indicated that the staff would also
study how information is currently disclosed and whether improvements can be
made to the presentation of company filings. Similarly, Ms. Stein has stated
that disclosures need to be more accessible, useful, and timely. In her May
2014 speech, she noted the following:
In an era where nearly
all data is electronic . . . a huge portion of public disclosures are
presented in a format that isn’t structured and easily accessible for
analytics. [The SEC] should be making sure that as many disclosures as
practicable are required to be submitted in useful, structured formats that
investors, the public, and the Commission can use. In the same vein, I
believe [the SEC] should require disclosures to be timelier. News and
business move faster than ever before. Does it still make sense for
investors to wait for quarterly or annual statements that are delivered
weeks or months later?
In particular, the SEC has questioned the
appropriateness of the format, structure, and timing of filings in light of
improvements in technology and ways that investors search for information.
In his March 2014 speech, Mr. Higgins discussed considerations related to
the SEC’s efforts to “harness the rapidly changing technology that has made
the sharing of information so efficient in other areas of life [and] bring
the same level of efficiency to how investors find information about a
company.” He also outlined the SEC’s plans to enhance the “navigability” of
disclosure documents by exploring:
Improved structured data, hyperlinks, or
topical indexes.
A “company disclosure” or “core disclosure”
system for certain information that changes less frequently or
infrequently—such as the description of the business and certain other
company information—which could be disclosed in a “core” document and
then supplemented by periodic and current reports.
Editor’s
Note: As part of examining potential improvements to
disclosure format, the SEC solicited support in July 2014 for modernizing
its EDGAR filing system. Contractors submitted proposals to provide “the
groundwork for SEC decision-making to shape the modernization effort,”
including:
—Reducing the number of
form types and acceptable data formats.
—Reducing the
duplication of information collected.
—Functionally improving
communications between filers and the SEC staff.
—Improving the
functional “look and feel” for a better filer and investor experience.
—“Other innovative ideas
that the contractor will bring to the table and that the contractor will
identify in their interviews with stakeholders.”
FASB Disclosure Improvement and
Simplification Efforts
The FASB has also been looking into ways to reduce
complexity and improve financial statement disclosures. In a June 2014
speech, FASB Vice Chairman Jim Kroeker noted that the “object of [the
Board’s disclosure framework] project is to remove the clutter, and focus on
making disclosures more useful to investors.”⁴ In a key step toward meeting
that objective, the FASB released an exposure draft for public comment in
March 2014 on its decision process for determining disclosures to require in
notes to financial statements (see Deloitte’s March 6, 2014,
Heads Upfor additional information). The
comment period ended in July 2014, and the FASB plans to start
redeliberations in September 2014. In addition, the Board has been
considering a similar decision-making framework for financial statement
preparers and has been reviewing information gathered in a field study by
its staff about how public, private, and not-for-profit organizations
determine which disclosures to provide in the notes to their financial
statements.
SUMMARY: Regulators have been concerned that the volume of
disclosures required of public companies has made their financial reports so
lengthy it's become harder for investors to find the most relevant
information. To address that problem, a committee of the Association of the
Bar of the City of New York is proposing yet another required disclosure for
companies: A short, plain-English overview, at the start of a company's
annual report, that would describe what happened at the company over the
past year and management's expectations and concerns for the year to come.
CLASSROOM APPLICATION: This is a good article to share with
students as we discuss annual reports and required disclosures.
QUESTIONS:
1. (Introductory) What is an annual report? What are its
components? What is the purpose of an annual report?
2. (Advanced) Who are the users of the annual report? How is this
information used? Why is accurate information and full disclosure important?
3. (Advanced) What has a group of lawyers proposed regarding the
requirements for annual reports? What is the reasoning behind this proposal?
What are the benefits of this proposal? Are there any drawbacks?
4. (Advanced) Should this proposal be implemented? Why or why not?
SMALL GROUP ASSIGNMENT:
Find the annual report for a large public company (either a physical copy or
online). Do you find that the critiques detailed in the article apply to the
financial information you are reviewing? Is information organized well? Are
the disclosures easy to find, read, and understand? Would the proposal
presented in the article be an improvement for the annual report you are
reviewing? Do you have other ideas for improvements to presentation?
Reviewed By: Linda Christiansen, Indiana University Southeast
A prominent lawyers’ group has an idea for how companies can improve
annual reports: write a letter explaining the results in plain English, as
Warren Buffett
often does it.
Regulators have been concerned that the volume of
disclosures required of public companies has made their financial reports so
lengthy it’s become harder for investors to find the most relevant
information.
To address that problem, a committee of the
Association of the Bar of
the City of New York is proposing yet another
required disclosure for companies: A short, plain-English overview, at the
start of a company’s annual report, that would describe what happened at the
company over the past year and management’s expectations and concerns for
the year to come.
“Business disclosure should not be akin to a game
of ‘Where’s Waldo’ in which a reader is left suspecting that critical
information is buried somewhere in the document but good luck finding it,”
Michael R. Young, who chairs the bar association’s financial-reporting
committee, wrote in a letter last week to Keith Higgins, the Securities and
Exchange Commission’s director of corporation finance. “Rather, the most
important information is best volunteered, up front, by management in a way
that is both understandable and provides context.”
The committee plans to announce its proposal
Monday. In an interview, Mr. Young called the proposal “a rule to cut
through the rules” and said it wouldn’t replace any of the existing,
more-detailed disclosures that the SEC requires of public companies. “The
goal is to encourage companies and executives to report on what’s going on
[to investors] much as they would to the board of directors,” he said.
The model, Mr. Young said, is the widely read,
plain-spoken
Berkshire Hathaway Inc.
shareholder letter that Mr. Buffett writes each
year. That “was sort of looked to as the platonic ideal” in developing the
new proposal, he said.
The SEC would be the agency to ultimately decide
whether to propose and implement such a move. The SEC’s Mr. Higgins said he
didn’t have any reaction to the committee’s proposal itself, but he likes
the idea in principle. “We encourage companies to make it easier to
understand what management thought for the prior year and what’s up for the
future,” he said.
According to 2012 research from accounting firm
Ernst & Young LLP, the average number of pages in annual reports devoted to
footnotes and management’s discussion and analysis has quadrupled over the
last two decades. In recent months, SEC officials have said they will look
at possible steps to make disclosure more effective, such as weeding out
outdated and redundant disclosure requirements.
“As the number of pages in annual reports has
steadily increased, it may become more difficult for investors to find the
most salient information,” Mr. Higgins said in an April speech to business
lawyers, in which he invited their suggestions.
Mr. Young says he “appreciates the irony” of
fighting disclosure overload by proposing another disclosure requirement.
But enacting such requirements is “the main tool regulators have to work
with” in solving the problem, he said.
As if they needed any, the
critics of fair value got a fresh new example of the
craziness of an oft-decried provision in FAS 157,
paragraph 15 of Fair Value Measurements. The
provision rewards companies whose credit spreads on
their debt liabilities have widened and punishes
those who have become more creditworthy.
On Wednesday, Morgan
Stanley reported that it had to cut its
first-quarter net revenues $1.5 billion because the
credit spreads on some of its long-term debt had
narrowed. What happened was that as the investment
bank grew more reliable to its creditors over the
first part of the year, its debt became more
valuable. And under the dictates of mark-to-mark
accounting, the firm had to take a writeoff because
of this very positive occurrence.
Sound nuts? It has sounded
so to many observers. In the 15th paragraph of 157
FASB says, nevertheless, that "the fair value of [a
company's] liability shall reflect the
nonperformance risk relating to that liability."
Thus, as the nonperformance risk--as reflected by
slimmer credit spreads—narrowed, Morgan Stanley had
to reflect the decreased value of its debt as a
decrease in sales on its income statement.
Like the alleged evils of
mark-to-market accounting in illiquid
markets—although to a lesser extent—the irrational
practice of forcing improved creditworthiness to be
reflected in revenue decreases has become fodder for
fair value’s enemies. When FASB made its recent
amendments to 157, it neglected to attack the
provision. If only to preserve fair-value accounting
from more political attacks, it should do so now.
"The Fair-Value
Deadbeat Debate Returns: On hiatus while other
fair-value questions were debated, the hotly-contested
issue of why companies can book a gain when their credit
rating sinks has returned to center stage," by
Marie Leone, CFO.com, June 29, 2009 ---
http://www.cfo.com/article.cfm/13932186/c_2984368/?f=archives
My main objection for entry or exit revaluation of fixed assets in
going concerns is that these revaluations create earnings fictions
if the unrealized gains and losses are posted to earnings. For
example, ups and downs in the value of the land under a giant Boeing
assembly plant are earnings fictions if there's zero chance that the
land will be sold apart from the factory and zero chance that Boeing
will sell the factory.
Revaluation makes more sense when when the probability of a factory
sale in the near future becomes much greater --- hence the reason
accounting rules call for exit valuation of non-going concerns.
Stock prices are of little use in revaluing booked assets and
liabilities because stock prices reflect market values of the
unbooked as well as the booked assets and liabilities such as the
values of the human resources, reputation, contingencies, and
off-balance sheet financing.
It's interesting to compare the history of theory debates over valuation
of booked assets and liabilities in going concerns. Theorists that
promoted historical costs like AC Littleton and Yuji Ijiri contended
that historical costs is not valuation at all --- they are simply
stewardship scorekeeping rules that have survived for over 500 years ---
survival of the fittest so to speak.
"The Asset and Liability View:
What It Is and What It Is Not—Implications for International Accounting
Standard Setting from a Theoretical Point of View"
Jens Wüstemann, University of Mannheim; Sonja Wüstemann, Goethe
University Frankfurt am Main
American Accounting Association Annual Meetings, August 4, 2010
http://aaahq.org/AM2010/display.cfm?Filename=SubID_2022.pdf&MIMEType=application%2Fpdf
A very concise
summary of the positions of various accounting theory experts in history
since 1909 and authoritative bodies over the years since 1936:
"Asset valuation: An historical perspective"
Authors: Racliffe, Thomas A. (Thomas Arthur) and Munter, Paul Accounting Historians Journal
1980
http://umiss.lib.olemiss.edu:82/record=b1000230
Jensen Comment: I really liked this summary of the valuation literature
prior to 1980.
For example, what was the main difference between
exit value advocates Chambers versus Sterling?
Two of the most vocal advocates of replacing historical costs with exit
values were the following members of the Accounting Hall of Fame:
Ray Chambers defined fair value accounting as the sum of the exit values of
all of its parts as if they would be sold in a yard sale. He thus ignored any
synergy value (value in use) of assets and
liabilities in combination under existing management. Bob Sterling defined fair
value as the exit value of groupings of assets and liabilities that captured
synergy value (value in use) of assets and
liabilities in combination under existing management.
Personally I think the Chambers valuation makes sense only when booked items
are to be sold for a non-going concern in a yard sale. Sterling's arguments make
more sense for going concerns, but estimates of such values of booked items is
usually quite impractical. Stock prices and valuations of segments of the
company are eof little help for booked item valuations
if those valuations include unbooked as well as booked items such as the values
of the human resources, reputation, contingencies, and off-balance sheet
financing.
Both the Chambers and Sterling exit value arguments add fictions to earnings
if the unrealized gains and losses of remeasurement are posted to earnings.
Famous Historical Cost Theorists
Probably the best known historical cost advocate of all time is AC Littleton
followed by mathematician Yuji Ijiri. Both argued that historical cost balance
sheets do not pretend to be valuations beyond the original dates on which the
transactions were booked into the ledgers. Balance sheet numbers are simply
residuals in from the calculation of income statement numbers under the
Realization Principle for revenues and the Matching Principle for costs and
expenses. Although Littleton and Ijiri also advocate price level adjustments,
they are not advocates of current value adjustments beyond supplementary
disclosures of exit values or entry values.
The most famous publication of the American Accounting Association is the
1941 monograph on historical cost theory by Paton and Littleton ---
http://www.trinity.edu/rjensen/theory02.htm#Paton
The biggest selling monographs in the AAA's Studies in Accounting Research
series are the double/triple bookkeeping monographs by Yuji Ijiri that were
rooted in historical cost accounting ---
http://aaahq.org/market/display.cfm?catID=5
Famous Exit Value (Disposal Value) Theorists
In history, the strongest advocates of exit value replacement of historical
costs in financial statements included Kenneth MacNeal, Bob Sterling, and
Australia's famous Ray Chambers. Their main arguments boiled down to very simple
wash sale illustrations. Suppose Company H and Company S begin with identical
balance sheets of A=$1000 Corn Inventory and E=$1.000 Equity where each company
paid $1 for 1,000 bushels of corn. In order to dress up the financial statements
before closing its books, Company S sells its corn for $2 per bushel in an
intended wash sale. Then immediately after closing its books Company S buys back
corn for $2 per bushel. Company S now has a balance sheet of A=$2,000 Corn
Inventory and E=$1000 Invested Capital + $1,000 retained earnings.
In the above example Company S looks like it performed twice as well as
Company H even though in the final outcome both remain identical in terms of all
economic criteria. Company H has simply undervalued its historical cost
inventories and did not realize any revenue from sales. In real life, however,
the situation is not so simple. In 1981 when Days Inns of America wanted to
dress up its historical cost balance sheet (for an IPO) the transactions cost of
selling each of its 300+ hotels would've been immense for selling and then
buying back each hotel. Accounting rules did not permit departing from
historical cost valuations for each of these hotels in its main Price
Waterhouse-audited financial statements.. However, nothing prevented Days in
from hiring a large real estate appraisal firm from deriving 1981 unaudited exit
value estimates of each of the 300+ hotels.
To make matters worse, the "value in use" of these 300+ plus hotels most
likely plunged dramatically the day its dynamic President had a sudden heart
attack and died at a very young age. A "value in use" estimate is much more
volatile than historical cost or replacement cost valuations.
The 1981 Days Inns Annual Report (for which I have three copies in my barn
remaining from my days of teaching in which I loaned a copy of this 1981 Annual
Report to each of my students) would've made MacNeal, Chambers, and Sterling
ecstatic. The historical cost book values of these 300+ hotels aggregated to
$87,356,000 whereas the exit values aggregated to an unaudited amount of
$194,812,000. Wow!
This is probably value added when it comes to financial analysts and
investors willing to trust these unaudited estimates from a real estate
appraisal firm. The numbers of course are much more subjective and easy to
manipulate for devious purposes than the cost numbers. Ande even if totally
accurate, there's a huge problem of having measured current hotel values of a
company's assets in there worst possible economic uses --- disposing each asset
separately in assumed liquidation of the company. The $194,812,000. sum of
disposal values of Days Inns hotels totally ignores the synergy value of these
when grouped together under the management of Days Inns. Exit value theorists
have never provided us with a way of measuring the value of the whole other than
by summing the exit disposal values of the parts. In reality the "value in use"
of these 300+ hotels might've been $294,812,000, $394,812,000, or $494,812,000.
We will never know because exit theorists cannot measure "value in use" of
grouped assets of one company let alone the "value in use" if these hotels are
sold to other companies like Holiday Inns of America where "value in use" is
probably very different than "value in use" for Days Inns.
Famous Replacement Cost (Entry Value) Theorists
I think the best known theorists advocating entry values (replacement costs) are
John Canning (in a published doctoral thesis) and William A Paton (in a lifetime
of writing and speaking). Although Paton's most famous book is probably the 1941
Paton and Littleton monograph on historical cost theory this was more of an
academic exercise for Bill Paton since his heart was truly in replacement cost
fixed asset valuations ---
http://www.trinity.edu/rjensen/theory01.htm#Paton
Whereas the exit value of a 20 year old hotel might be $1 million in a
liquidation sale, the replacement cost (entry value) of a new hotel might be $5
million. In entry value theory this $5 million would have to be adjusted for 20
years of hypothetical depreciation to arrive at its $2 million replacement cost
estimate. Exit value theorists are proud of their not having to resort to
arbitrary depreciation calculations. Entry value theorists are proud of being
able to estimate current values when exit values are meaningless.
Many older assets may have $0 exit value even though their value in use is
still considerable. This is especially the case when costs of dismantling an old
and large piece of equipment and re-installing it in another factory is so
prohibitive that nobody will pay to re-install the item. There's also the
problem of the way exit value markets work even for new assets. If a farmer pays
$500,000 for a new diesel tractor the exit value may decline by 100,000 before
the tractor is moved from tractor dealer's show room. Such is the nature of
"new" versus "used" equipment exit values even when used is still or almost
new.. Entry values are not quite so flaky since the replacement cost of that
tractor might remain constant between the date of purchase and a month later
after the tractor was used vigorously.
Also in the case of exit values of 300+ hotels, exit values of a New Orleans
Days Inn versus a Fargo Days Inn (of identical age, style, and sizes) may differ
greatly due to variations resale markets in local economies. This is not
generally true of replacement costs since the cost of constructing new hotels is
not so variable in terms of local economies.
Thus replacement costs overcome the flaky nature of many exit value
estimates. But replacement costs suffer from the same maladies of historical
cost valuations in that arbitrary formulas for such things as depreciation and
amortization.
Also Paton's writings are best known from the days before we had accounting
standard setting bodies like the APB, FASB, and IASB. The AICPA and its ARB
committees seldom set accounting rules on really controversial issues. Instead
GAAP, like common law, was drawn from "generally accepted" practices of
accounting in industry and practices acceptable to accounting system auditors.
The SEC was formed in 1933 with powers to dictate accounting standards for
corporations listed on major stock exchanges in the U.S. However, the SEC was
then and still is reluctant to take standard setting away from professional
accountants.
In 1932 corporations and their auditors had much more flexibility than today
in how to value current and fixed assets than the have today. For example in
2010 both the FASB and IASB rules virtually require historical cost inventory
valuation for the majority of inventories reported globally in balance sheets.
But in 1932 it was much easier for a company to report inventories at current
values if its shareholders did not make a big fuss over exit value or entry
value reporting of inventories.
But in since the crash of 1929, most companies stuck with historical cost
valuation. Beside my desk I always keep the Second Edition of Accountants'
Handbook edited by and heavily written by William A. Paton. The First
Edition is dated 1923, and my copy is the Second Edition dated 1932.
Market
Value Accounting: Entry Value (Current Cost,
Replacement Cost) Accounting
Beginning
in 1979, FAS 33 required large corporations to provide a supplementary schedule
of condensed balance sheets and income statements comparing annual outcomes
under three valuation bases --- Unadjusted Historical Cost, Price Level Adjusted
(PLA) Historical Cost, and Current Cost Entry Value (adjusted for depreciation
and amortization). Companies complained heavily that users did not obtain value
that justified the cost of implementing FAS 33. Analysts complained that the
FASB allowed such crude estimates that the FAS 33 schedules were virtually
useless, especially the Current Cost estimates. The FASB rescinded FAS 33 when
it issued FAS 89 in 1986.
Current
cost accounting by whatever name (e.g., current or replacement cost) entails the
historical cost of balance sheet items with current (replacement) costs.
Depreciation rates can be re-set based upon current costs rather than historical
costs.
Beginning
in 1979, FAS 33 required large corporations to provide a supplementary schedule
of condensed balance sheets and income statements comparing annual outcomes
under three valuation bases --- Unadjusted Historical Cost, PLA-Adjusted
historical cost, and Current Cost Entry Value (adjusted for depreciation and
amortization). Companies are no longer required to generate FAS 33-type
comparisons. The primary basis of accounting in the U.S. is unadjusted
historical cost with numerous exceptions in particular instances. For example,
price-level adjustments may be required for operations in hyperinflation
nations. Exit value accounting is required for firms deemed highly likely to
become non-going concerns. Exit value accounting is required for personal
financial statements (whether an individual or a personal partnership such as
two married people). Economic (discounted cash flow) valuations are required for
certain types of assets and liabilities such as pension liabilities. Hence in
the United States and virtually every other nation, accounting standards do not
require or even allow one single basis of accounting. Beginning in January 2005,
all nations in the European Union adopted the IASB's international standards
that have moved closer and closer each year to the FASB/SEC standards of the
United States.
Advantages
of Entry Value (Current Cost, Replacement Cost) Accounting
·Conforms
to capital maintenance theory that argues in favor of matching current revenues
with what the current costs are of generating those revenues. For example, if
historical cost depreciation is $100 and current cost depreciation is $120,
current cost theory argues that an excess of $20 may be wrongly classified as
profit and distributed as a dividend. When it comes time to replace the asset,
the firm may have mistakenly eaten its seed corn.
·If the
accurate replacement cost is known and can be matched with current selling
prices, the problems of finding indices for price level adjustments are avoided.
·Avoids to
some extent booking the spread between selling price and the wholesale "cost" of
an item. Recording a securities “inventory” or any other inventory at exit
values rather than entry values tends to book unrealized sales profits before
they’re actually earned. There may also be considerably variability in exit
values vis-à-vis replacement costs.
Although I
am not in general a current cost (replacement cost, entry-value) advocate, I
think you and Tom are missing the main theory behind the passage of the now
defunct FAS 33 that leaned toward replacement cost valuation as opposed to exit
valuation.
The best
illustration in favor of replacement cost accounting is the infamous Blue Book
used by automobile and truck dealers that lists composite wholesale trading for
each make and model of vehicle in recent years. The Blue Book illustration is
relevant with respect to business equipment currently in use in a company since
virtually all that equipment is now in the “used” category, although most of it
will not have a complete Blue Book per se.
The theory
of Blue Book pricing in accounting is that each used vehicle is unique to a
point that exit valuation in particular instances is very difficult since no two
used vehicles have the same exit value in a particular instances. But the Blue
Book is a market-composite hundreds of dealer transactions of each make and
model in recent months and years on the wholesale market.
Hence I
don’t have any idea about what my 1999 Jeep Cherokee in particular is worth, and
any exit value estimate of my vehicle is pretty much a wild guess relative to
what it most likely would cost me to replace it with another 1999 Jeep Cherokee
from a random sample selection among 2,000 Jeep dealers across the United
States. I merely have to look up the Blue Book price and then estimate what the
dealer charges as a mark up if I want to replace my 1999 Jeep Cherokee.
Since Blue
Book pricing is based upon actual trades that take place, it’s far more reliable
than exit value sticker prices of vehicles in the sales lots.
Conclusion
It is sometimes the replacement market of actual transactions that makes a Blue
Book composite replacement cost more reliable than an exit value estimate of
what I will pay for a particular car from a particular dealer at retail. Of
course this argument is not as crucial to financial assets and liabilities that
are not as unique as a particular used vehicle. Replacement cost valuation for
accounting becomes more defensible for non-financial assets.
Disadvantages of Entry Value (Current Cost, Replacement Cost) Accounting
·Discovery
of accurate replacement costs is virtually impossible in times of changing
technologies and newer production alternatives. For example, some companies are
using data processing hardware and software that no longer can be purchased or
would never be purchased even if it was available due to changes in technology.
Some companies are using buildings that may not be necessary as production
becomes more outsourced and sales move to the Internet. It is possible to
replace used assets with used assets rather than new assets. Must current costs
rely only upon prices of new assets?
·
Discovering current costs is prohibitively costly if firms have to repeatedly
find current replacement prices on thousands or millions of items.
·Accurate
derivation of replacement cost is very difficult for items having high
variations in quality. For example, some ten-year old trucks have much higher
used prices than other used trucks of the same type and vintage. Comparisons
with new trucks is very difficult since new trucks have new features, different
expected economic lives, warranties, financing options, and other differences
that make comparisons extremely complex and tedious. In many cases, items are
bought in basket purchases that cover warranties, insurance, buy-back options,
maintenance agreements, etc. Allocating the "cost" to particular components may
be quite arbitrary.
·Use of
"sector" price indices as surrogates compounds the price-index problem of
general price-level adjustments. For example, if a "transportation" price index
is used to estimate replacement cost, what constitutes a "transportation" price
index? Are such indices available and are they meaningful for the purpose at
hand? When FAS 33 was rescinded in 1986, one of the major reasons was the error
and confusion of using sector indices as surrogates for actual replacement
costs.
·Current
costs tend to give rise to recognition of holding gains and losses not yet
realized.
***********Begin Quote
The most straightforward way to determine replacement cost to meet the wealth
measurement objective is to ask oneself what would be the least amount one would
have to pay for an asset (or a similar asset that provided the same utility), if
one did not actually already own it. It seems to me that real estate appraisers
make estimates for specific properties on that basis as a matter of course.
Often, their best estimate is the result of making somewhat objective
adjustments to 'comparables' for age, floor space and even location.
Having said that, I would allow for any number of approaches to approximating
replacement cost, so long as they adequately answered the question I posed in
the previous paragraph. Like FAS 157, the greater the subjectivity in the
estimates, the more detailed would be the disclosures. However, in all cases, I
would require reconciliations of the changes in balance sheet accounts in
sufficient detail to make all assumptions, and changes in assumptions,
transparent.
***********End Quote
True Story
Bob Jensen has a Sears Craftsman snow thrower purchased in 2006 for $1,800 with
a five-year onsite warranty for all parts and labor. If he decides to replace
the machine every five years, he’s really not concerned with physical
deterioration if he assumes that the salvage value is after five years is $300
for a perfectly working machine maintained by Sears mechanics at his beckoning
call. There is historical cost depreciation of $300 per year assuming the
decline in value on the used snow machine market is strictly linear. Assume that
replacement cost depreciation is $$350 per season.
Bob’s good
friend Helmut Gottwick survived four years as an engineer and machinist on a
German U-Boat in World War II. After arriving in New Hampshire in 1950 he bought
a used snow thrower for $24. It was made by Studebaker in 1937. Unlike Bob
Jensen who has no mechanical skills whatsoever, Helmut can make most old
machines work perfectly as long as he is still of sound mind and body to work in
the machine shop in his garage. He’s totally rebuilt the Studebaker snow thrower
engine two times, including the making of virtually all new parts in his shop.
Assuming that his remaining life expectancy was 60 years in 1950, the
depreciation on his snow thrower is $0.40 per year for the rest of his life.
Assume replacement cost depreciation is $350 per season.
Fiction
Added
Suppose Bob and Helmut clear driveways for neighbors for an average of $1,000
per season net of gasoline expense (there’s a lot of snow in these mountains).
Replacement cost write ups of Bob Jensen’s snow machine and depreciations of
$350 per year make some sense on Capital Maintenance Theory. If Bob Jensen used
historical cost accounting and declared a $700 dividend to himself each season,
he would not have sufficient retained earnings to cover the cost of a new snow
thrower every five years. It makes some sense, therefore, for Bob to only
declare a $650 dividend for wild women and booze. If he saves an amount of cash
equal to retained earnings each season, he will have sufficient savings to buy
that new snow thrower after every five year period.
But
suppose we impose a replacement cost accounting rule on Helmut Gottwick’s snow
throwing business. If he can only declare a $650 dividend every year the fact of
the matter is that for 60 years he’s have been deprived of a lot of wild women
and booze (in reality he’s a very devoted husband and grandfather). His reported
earnings also distort the fact that, because of his machinist skills, he's a
heck of a lot better business man than Bob Jensen who must settle for older
women and younger whiskey.
The Point
of the Story
Replacement cost accounting can distort reported assets and earnings under
totally different maintenance and replacement policies. Over 60 years, the CPA
auditing firm might uselessly force Helmut Gottwick to retain $350 per year for
a machine that cost him $24 in 1950 and has a useful life of 60 years in his
situation, Capital maintenance theory makes no sense in Helmut’s case since
during his lifetime the old Studebaker snow thrower will work as well or better
than a new snowthrower. In Bob Jensen’s situation, capital maintenance theory
makes much more sense.
In truth
Helmut would not be required to take $350 replacement cost depreciation for 60
years, because he would only be required to bring book value up to depreciated
replacement value each year. But I thought my exaggeration above made a better
story.
A very concise summary of the
positions of various accounting theory experts in history since 1909 and
authoritative bodies over the years since 1936:
"Asset valuation: An historical perspective"
Authors: Racliffe, Thomas A. (Thomas Arthur) and Munter, Paul Accounting Historians Journal
1980
http://umiss.lib.olemiss.edu:82/record=b1000230
Jensen Comment: I really liked this summary of the valuation literature prior
to 1980.
For example, what was the main difference between exit
value advocates Chambers versus Sterling?
Many people had tried.... over time: weightlifters, longshoremen, etc., but
nobody could do it.
One day, this scrawny little fellow came into the bar, wearing thick glasses
and a polyester suit, and said in a small voice, "I'd like to try the bet."
After the laughter had died down, the bartender said, "OK"; grabbed the
lemon; and squeezed away. Then he handed the wrinkled remains of the rind to the
little fellow. But the crowd's laughter turned to total silence.... as the man
clenched his little fist around the lemon.... and six drops fell into the glass.
As the crowd cheered, the bartender paid the $1,000, and asked the little
man, "What do you do for a living? Are you a lumberjack, a weight-lifter, or
what?"
The little fellow quietly replied: "I work for the IRS."
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
Abstract
This case provides an opportunity for you to make accounting allocation
choices, justify those choices, and subsequently consider the ramifications
of those choices. Two different scenarios – one in the academic setting and
one in the business setting – examine the incentives and reporting issues
faced by managers and accountants – the gatekeepers in these reporting
environments. For each scenario, you will read the case materials, related
tables, and then answer the Questions for Analysis. Each scenario presents
you with an allocation task. In the first scenario, you will need to assess
group members’ contributions to a project and allocate points across the
group. These point allocations contribute to the determination of individual
group members’ grades. The second scenario is also an allocation task but in
a business setting, specifically the segment reporting environment. Here the
task is to allocate common costs across reporting segments. For advanced
reading, you will want to consider Accounting Standards Codification (ASC)
topic 820 which addresses segment reporting, as this can help guide you in
the degree of flexibility, if any, allowed in determining how to allocate
costs.
Abstract:
This paper examines the background and work of the AICPA’s Accounting
Objectives Study Group, chaired by Robert M. Trueblood, which issued its
important report in October 1973. In particular, the research is informed by
interviews with three members of the Study Group and with four of the
principal members of its research staff. Evidence is presented on the
members of the Study Group who supported, or did not support, various
positions in the report, including their apparent reasons, as well on the
influential role of the staff in shaping the report. The conclusion is that
the full-time staff, abetted by the financial analyst member of the Study
Group, played the key role in driving the thrust of the final report, which
recommended that financial statements should provide users with information
about the cash-generating ability of the enterprise, and eventually the cash
flow to the users themselves. This
recommendation resonated with the FASB and with standard setters around the
world.
Abstract:
From its founding in 1934 until the early 1970s, the SEC and especially its
Chief Accountant disapproved of most upward revaluations in property, plant
and equipment as well as depreciation charges based on such revaluations.
This article is a historical study of the evolution of the SEC's policy on
such upward revaluations. It includes episodes when the private-sector body
that established accounting principles sought to gain a degree of acceptance
for them and was usually rebuffed. In the decade of the 1970s, the SEC
altered its policy. Throughout the article, the author endeavors to explain
the factors that influenced the positions taken by the parties.
Abstract:
I develop an econometric strategy that allows identification of accounting
quality. The strategy relies on a new way of characterizing the dynamics of
accounting accruals. The characterization is intuitive and does not hinge on
strong assumptions about the earnings and accrual processes, or about
managerial preferences. The identifying assumptions derive from two
accounting properties, namely, that both earnings and cash flows reflect the
same underlying performance and that accruals and accounting errors must
reverse over time. My approach discriminates between the accounting error
and the part of accruals that captures the underlying economic performance.
The proposed framework also offers a new way of testing for the presence of
earnings management. Implementation issues and empirical evidence are
discussed in a companion paper (Nikolaev 2014).
Auditing regulators have found deficiencies in 28
of the Ernst & Young LLP audits they evaluated in their latest annual
inspection of the Big Four accounting firm's work.
The 28 deficient audits the Public Company
Accounting Oversight Board found in its 2013 inspection of the firm were out
of 57 audits or partial audits conducted by Ernst & Young that the PCAOB
evaluated—a deficiency rate of 49%. In the previous year, the board's
inspectors found deficiencies in 25 of 52 audits inspected, a rate of 48%.
A deficiency cited by the inspectors doesn't mean
that the subject of the audit needs a restatement, or that the problems
found remained unaddressed after the inspectors found them.
Still, certain of the deficiencies found were
significant enough that it appeared that Ernst & Young hadn't obtained
enough evidence to support its audit opinions giving its clients a clean
bill of health, the PCAOB said in the inspection report it issued Thursday.
In a statement responding to the report, Ernst &
Young said it was "fully committed to audit quality" and that the PCAOB's
inspection process "assists us in identifying areas where we can continue to
improve."
Fees = Transactions Costs (when buying or
selling shares) plus Fund Management Fees (paid annually to professionals who
manage your portfolio like the managers at TIAA/CREF, Fidelity, Vanguard, etc.).
manage your retirement funds.
Taxes = Capital Gains Taxes (that apply
even on retirement funds like CREF when you make eventual withdrawals). Note
that capital gains taxes must be paid by your estate on the balances left in
your retirement funds. Most of us won't get hit with estate taxes (due to high
estate tax exemptions), but we all get hit with capital gains taxes on the
retirement funds and farms we leave behind for heirs.
Inflation = Loss in Buying Power of
Saving Dear Money That Turns Into Cheap Money (even under your mattress)
The government is now misleading us about inflation by taking price increases
for food and fuel out of its reported inflation index so you think that
your dollars are still dear when they are cheap in terms of things that you buy
day-by-day. Economists are whores for politicians. Government deficit
spending and obligations for $100 trillion in unfunded entitlements (like
Medicare and Medicaid) make inflation the biggest worry of the three diseases on
retirement savings --- fees, taxes, and inflation.
Real, real returns take into account expenses (the
man), taxes (Uncle Sam), and inflation (the invisible hand).
Thornburg's study notes that "nominal returns are a
misleading driver of an investor's investment and asset-allocation
planning... because they are significantly eroded by taxes, expenses and
inflation." The risk then, as Thornburg sees it, is that a failure to
understand real, real returns could lead to investment decisions that miss
potential diversification opportunities.
This chart from Thornburg shows how the annualized
nominal return of $100 invested in the S&P 500 between 1983 and 2013 is
about 11%, making that investment worth $2,346.
However, on a real, real basis that investment
returns 6%, making it worth just $570.
A pretty stark difference between expectations and
reality.
Jensen Comment
There are ways of partly beating the tax man by investing a portion of your
retirement funds in a tax-exempt mutual fund that holds bonds of school
districts, towns, cities, counties, and states. However, I say "partly beats" in
the sense that value changes in those funds are subject to capital gains taxes
even if the interest on those bonds that builds up your savings are not taxed
while your earn that interest or when you withdraw that interest. A second
drawback is that there is relatively more risk in investing in a given tax-free
municipal bond versus a taxable high-grade corporate bond. But huge diversified
tax-free mutual funds like those of Fidelity and Vanguard. A third drawback
in theory is that tax-free bonds should earn less interest than corporate
bonds. This is not always the case in this era of stupid quantitative easing by
the Federal Reserve that keeps interest rates on CDs and high-grade corporate
bonds close to zero. Tax-free interest rates have held up batter in this idiotic
era of quantitative easing since the crash of 2007.
Remember that higher return investments also carry higher financial risks
beyond the savings killers of fees, taxes, and inflation. For example land
investments have less inflation risks but are subject to many other financial
risks. For example, think of paying a million dollars for an Iowa farm that sold
ten years ago $500,000 and doubled in value because of the corn ethanol
government mandate for gasoline. The added financial risk for your new farm is
that one day soon the government will come to its senses and remove the ethanol
mandate for fuel, thereby leaving the corn for cows and hogs. Your million
dollar farm may plunge in value --- thus the added investment risk beyond the
retirement savings killers of fees, taxes, and inflation.
Jensen Comment
If you are an active buyer like me on Amazon it probably pays to become a Prime
member.
One advantage of living in the boon
docks is home delivery when you're not at home. I know the rural mail carrier
(Mary), the UPS driver (Joe), and the FedEx drivers all by name. They leave the
deliveries in our unlocked garage in rain, snow, or shine. When I lived in San
Antonio I would've not dared to leave our garage unlocked. City living is just
more scary and a hassle in many other ways.
Don't forget to use your accumulated
payment credits on Amazon. Amazon makes it really easy to use those points when
making a payment.
Taxpayers who received health insurance from Obamacare need to file Form
1095-A with their tax returns in 2014 and every year thereafter.
. . .
Funneling subsidies through the income-tax system
was once seen as a political plus for Obama and the law's supporters. It
allowed the White House to claim that the Affordable Care Act is "the
largest tax cut for health care in American history." But it also promises
to make an already complicated tax system more difficult for many consumers.
Supporters of the law are also concerned about a
related issue: People who got too big a subsidy for health care in 2014 will
have to pay it back next year. And docking refunds will be the first way the
IRS seeks repayment.
That can happen if someone's income for 2014 ends
up being higher than estimated when he or she first applied for health
insurance. Unless such people promptly reported the change to their health
insurance marketplace, they will owe money.
"If someone wound up having more overtime than they
projected, or they received a bonus for good work, these are the kind of
changes that have an impact on subsidies," said Ron Pollack, executive
director of the advocacy group Families USA.
Since the whole system is brand-new, experts are
predicting that millions will end up having to repay money.
Electric Car Owners Contribute Nothing or Almost Nothing to Road Repairs
While Gasoline and Diesel Fuel Vehicles Foot the Road Repair Bills
Jensen Comment
Tesla Model S owners now have a trillion mile warranty (of eight years) where
all those miles are a free ride to Tesla owners in terms of the road and bridge
depreciation they help cause. This is a wealth transfer that nobody seems to
talk about where poor people in old gas guzzlers are paying for the road and
bridge repairs enjoyed as a free good by rich Model S owners.
In Virginia electric car owners pay $64 per year for road repairs. Big deal.
In Julia Phillips’ 2002
People magazine obituary, Joni Evans, her editor
for the raucous 1991 memoir, “You’ll Never Eat Lunch In This Town Again,”
says,
“Where some of us glow, she burned.”
Phillips, an Oscar winner at age 29 as a producer
of The Sting, and the first women to do so, burned bridges for sure. But she
died, at age 57 of cancer, with no regrets, according to her daughter Kate.
I read Phillips’ book in 1991. The paperback is still on my shelves. I
remember thinking that someday I wanted to write with the same ferociousness
and the same freedom.
Mark Leibovich’s
“This Town” is billed in the flap copy of the dust
jacket as, “a blistering, stunning —and often hysterically funny—
examination of our ruling class’s incestuous ‘media industrial complex.’”
Others have written tell-all books about Washington DC, lobbyists, and the
revolving door between the legislative and executive branches of government
and the media, regulators and industry—especially “shadow regulator”
consulting firms.
I previously reviewed Dean Starkman’s book, “The
Watchdog That Didn’t Bark”. It’s
got plenty of criticism of “access journalism” and what he believes was a
softening of coverage by the business press leading up to the financial
crisis. That couldn’t have made him too popular amongst his journalism
peers, although his position as an editor of the Columbia Journalism Review
means they have to talk to him.
Jeff Connaughton, who is mentioned briefly in
Liebovich’s book, wrote a book about Washington DC and the negative
influence of lobbyists and their client’s money that even he, a former
lobbyist, said was a bridge-burner. Connaughton’s book, “The
Payoff: Why Wall Street Always Wins”,
reviewed
here, has more mentions of the auditors and their
role in the crisis, although not by name or related to a specific case, than
any other post-crisis book I’ve read.
I’m as guilty as anyone of looking for my name and
the names of the Big Four audit firms in the index of any business book
about the financial crisis. Few mentioned the auditors at all but
my name has started showing up. However, the back
of the Leibovich book jacket has a warning to readers: The book contains no
index.
“Those players wishing to know how they came
out have to read the book.”
Cheeky.
I guess Leibovich, like Starkman, is confident
they’ll have to talk to him anyway and maybe even continue to break bread
with him. That’s because
Mark
Leibovich is the chief national correspondent of
the New York Times Magazine. He came to the Times in 2006 from the
Washington Post, where he spent nine years.
His book is notable for how current it is—it was
published in 2013— and yet how out of date it is already. Leibovich mentions
many key players who moved from media to industry, government to industry,
and even government to media. In less than two years since the book was
published, however, several more have gone through the revolving door.
Everyone has to make a living, so far be it
from us to complain that David Plouffe, President Obama’s former chief
political strategist, is joining a private business [Uber] to fight
government regulation.
Many of Leibovich’s New York Times colleagues,
mentioned in the acknowledgements, are already gone from the paper. His
opening vignette about “Meet the Press” host Tim Russert’s memorial service
“networking opportunity” in June of 2008 puts his replacement, David
Gregory, front and center in the narrative. Gregory just lost that job,
without even an
“Ann Curry moment” to say goodbye.
It’s like Gregory died, too.
“This Town” utilizes two techniques that were
widely used by journalists writing about the financial crisis:
The well-chosen vignette structure (A
metanarrative “is a global or totalizing cultural narrative schema
which orders and explains knowledge and experience” according to
John Stephens and Robyn McCallum, as cited in
Wikipedia.)
The heavy reuse of your own previously
published work tactic
Leibovich organizes his meta-narrative around some
colorful characters.
(Selfish aside: I recently heard the term
“narrative” described, in a “Law and Order: Criminal Intent” episode, as a
postmodern concept. I did not know that so I looked it up. From the
“Encyclopedia of Marxism”:
Grand narrative or “master narrative” is a term
introduced by Jean-François Lyotard in his classic 1979
work
The Postmodern Condition: A Report on Knowledge,
in which Lyotard summed up a range of views which
were being developed at the time, as a
critique of the institutional and
ideological forms of knowledge.
Narrative knowledge is knowledge in the form of
story-telling.
Keep this in mind when an editor tells you that an
investigative piece or whitepaper has to tell a story.)
Richard Holbrooke, one of Leibovich’s vignette
subjects, died in December 2010, two years into the Obama presidency.
James Mann’s “The
Obamians”, published in 2012 and
excerpted in Slate, said Holbrooke was “of the
wrong generation, serving at the wrong time” in the Obama administration.
Another vignette tells the story of a top press aide for Rep. Darrell Issa,
R-Calif. He lives a Cinderella story, becoming a top advisor to the
congressman, but leaves in a scandal about his own loose lips, only to get
his job back before the book ends. That staffer, Kurt Bardella, is now
CEO of his own “crisis communications” firm,
Endeavor Strategic Communications.
The vignette I like best, though, is about Tammy
Haddad and her “Tam Cam”. Haddad is a former cable TV producer who now acts
as a Washington
“social convener”, in Leibovich’s words, on behalf
of paying clients like Politico, Bloomberg, Condé Nast and HBO.
Haddad’s “Tam Cam” handheld video interview
series, launched for Newsweek and appeared in Politico,
has made headlines and Drudge sirens. Her guests include major public
figures from candidate Senator Barack Obama to Robert DeNiro. She is the
Co-Founder and Editor-in-Chief of WHCInsider.com, the White House
Correspondents Insider website covering political and media culture.
Haddad is such a Washington, DC institution
that Christopher Buckley made her a character in his best selling novel
about Washington, Thank You for Smoking, calling her “a force
of nature.”
Haddad is still doing what she does, most notably
hosting one of the hottest tickets during Correspondent’s Dinner Weekend
in Washington. But Haddad is one of those Leibovich
softly parodies when he says, “You know you’ve made it in D.C. when someone
says … ‘It isn’t clear what he does’ about you.”
Continued in article
A Possible Teaching Case to Either "dial up
financial risk" (speculate) or "dial down
financial risk" (hedge)
Jensen Comment
Derivative financial instruments are used in two ways --- to speculate with high
(leveraged) financial risk or to hedge financial risk. For example, an investor
with no corn crop might buy put options at relatively low premium prices to sell
corn in at a future (strike) price in a speculation that the contracted strike
price at the maturity of the option will be higher than the spot price on that
date with the difference also being greater than the price paid for the option.
.The option holder who has no corn to sell can net settle the speculation option
for cash and never really has to buy and resell the corn at the strike price.
This is a speculation in what is known as a naked option because the investor
has no corn to back the contracted sale amount (the notional).
On the other hand a farmer with harvested corn in storage can purchase a put
option to sell the corn at a future (strike) price. This is not a naked option
because the farmer has the corn to cover the future sale. The put option simply
locks in the sale's strike price. This is one way to hedge against unknown spot
prices in the future. Actually the farmer can sell the corn inventory at the
spot price and the net-settled put option will either increase or decrease the
combined sales price to the strike price. The hedge in reality locks in the
future sales price of the corn to the strike price in the put contract.
There are of course various other types of financial derivative contracts
including futures contracts (exchange traded), forward contracts (not exchange
traded), and swaps that are portfolios of forward contracts. These other
contracts differ fundamentally in that some require no purchase prices like
options require purchase prices (premiums) but face greater risks in
speculations.
Hence an investor can use financial instrument derivatives to either "dial
up financial risk" (speculate) or "dial down
financial risk" (hedge). The actual process can become very
complicated with investors changing positions over time with the acquisition of
successive counter positions in risk exposure.
A large California pension manager is using complex
derivatives to supercharge its bets as it looks to cover a funding shortfall
and diversify its holdings.
The new strategy employed by the San Diego County
Employees Retirement Association is complicated and potentially risky, but
officials close to the system say it is designed to balance out the fund's
holdings and protect it against big losses in the event of a stock-market
meltdown.
San Diego's approach is one of the most extreme
examples yet of a public pension using leverage—including instruments such
as derivatives—to boost performance.
The strategy involves buying futures contracts tied
to the performance of stocks, bonds and commodities. That approach allows
the fund to experience higher gains—and potentially bigger losses—than it
would by owning the assets themselves. The strategy would also reduce the
pension's overall exposure to equities and hedge funds.
The pension fund manages about $10 billion on
behalf of more than 39,000 active or former public employees.
San Diego County's embrace of leverage comes as
many pensions across the U.S. wrestle with how much risk to take as they
look to fulfill mounting obligations to retirees. Many remain leery of
leverage, which helped magnify losses for pensions and many other investors
in the financial crisis. But others see it as an effective way to boost
returns and better balance their holdings.
"We think we'll see a lot more people look at risk
the way we do in the not-too-distant future," said Lee Partridge, chief
investment officer of Houston-based Salient Partners LP, the firm hired to
manage the county's money. "Yes, we are an outlier, but that is not a bad
thing."
Mr. Partridge said one of the main goals is to
avoid an overreliance on the stock market for returns.
Like many public plans around the country, San
Diego County's fund doesn't currently have enough assets to meet its future
obligations. The plan is about 79% funded, it says. It gained 13.4% last
year.
As a group, state pension funds across the U.S.
have enough assets to cover just 75% of future benefits for their members,
according to Wilshire Associates, an investment consultant in Santa Monica,
Calif.
San Diego board members haven't yet set a limit on
how much leverage would be used, but one estimate floated at an April board
meeting is the bet could involve an amount equal to as much as 95% of the
fund's assets. Simply put, it could have a market exposure of $20 billion
despite only managing half that amount.
Wilshire Associates Managing Director Andrew Junkin
said more pension funds are now "examining leverage" as they seek to add
balance to their portfolios, meet return targets and reduce their reliance
on stocks.
San Diego's new approach is comparatively complex
at a time when some big pension plans are moving in the opposite direction.
The country's biggest pension, California Public Employees' Retirement
System, is weighing a number of changes to its investment strategy designed
in part to simplify the portfolio, The Wall Street Journal reported this
week.
San Diego's plan was approved by the county in
April but didn't receive much attention until this week, when a local
newspaper columnist wrote criticizing the strategy. In response, the pension
fund posted a letter on its website to answer questions on the issue.
Some local residents said they were wary.
"Larger [pension] systems are moving away from
risk, and try to be a little more conservative. We don't need to see our
systems move in the opposite direction," said Chris Cate, a taxpayer
advocate in San Diego, who is running for city council.
San Diego-area residents are well-acquainted with
pension problems. A decade ago, the city's pension, which is separate from
the county's, endured a scandal after its accounts were found riddled with
errors, though the matter didn't involve sizable investment losses.
Then, in 2006, the collapse of Connecticut hedge
fund Amaranth Partners LLC created tens of millions in losses for the
county's fund. Amaranth made a series of risky bets on natural-gas futures.
"Leverage is a tool, and it can be used improperly.
And if it's used improperly, you could suffer large losses, as shown in
Amaranth," said Brian White, chief executive of the retirement system in San
Diego County.
The CEO said there is a "huge difference" between
Amaranth's approach and the one being employed by Salient. The investments
being made by Salient, Mr. White said, are "highly liquid" and diverse, as
compared with the illiquid, very concentrated bets made by Amaranth.
Salient is being paid $10 million annually for
managing San Diego County's pension fund.
Public funds still have most of their assets in
stocks, but many funds that were burned by the tech-stock bust and the 2008
financial crisis have turned to private equity, real estate and hedge funds
as alternatives.
Public pensions for years have had indirect
exposure to borrowed money through property or buyout funds, but most have
steered clear of putting more money at risk than they have in their
portfolios.
The State of Wisconsin Investment Board was one of
the first to embrace the leveraged approach. Trustees in 2010 approved
borrowing an amount equivalent to 20% of assets for purchases of futures
contracts and other derivatives tied to bonds.
Wisconsin staff members initially thought putting
100% of assets at risk might protect the fund against a variety of economic
scenarios, but they concluded that such an amount "could be considered to be
a substantial amount of explicit leverage for a pension fund," according to
a December 2009 report.
Wisconsin's fund has remained among the healthiest
public pensions in the country and currently has enough assets to meet all
future obligations to retirees.
A spokeswoman said the Wisconsin system is moving
slowly on its strategy because of concerns about adding leverage at a time
when economists expect interest rates to rise as the U.S. economy
strengthens. That would cause bond prices to fall, and leverage could
magnify the impact of those declines on the fund's assets. The current
amount at risk on Wisconsin's strategy is roughly 6% of the fund's $90.8
billion in assets.
Jensen Comment
The accounting rules for accounting for derivatives vary greatly in terms of
whether the unsettled outstanding contracts are deemed speculations or hedges.
For business firms those rules are dictated by FAS 133 and its FASB amendments
in the USA. The international rules were dictated by IAS 39 soon to be replaced
by IFRS 9 of the IASB.
From the CFO Journal's Morning Ledger on August 29, 2014
KPMG faces criticism over Espírito Santo collapse ---
http://online.wsj.com/articles/kpmg-faces-criticism-for-espirito-santo-audit-work-1409227480?mod=djemCFO_h
Espírito Santo Group‘s
collapse raises questions about whether its auditor
KPMG LLP should
have detected problems before the bank’s unraveling sent shock waves across
European markets this summer. KPMG was the auditor of Espírito Santo
Financial Group SA, which filed for creditor protection in July, Banco
Espírito Santo SA, which was bailed out in August, and of dozens of related
companies. It was also the auditor of three offshore investment vehicles
that trafficked in Espírito Santo debt. Critics say the scope of the audit
work could have put it in a position to identify the billions of euros that
were secretly flowing amount group companies.
From the CFO Journal's Morning Ledger on August 29, 2014
A former detective working for Austria’s struggling
Hypo Alpe-Adria-Bank
International Group AG is teasing out the
details of a lending catastrophe
that has already cost taxpayers in Europe billions of
euros, and is likely to cost billions more. Six of the bank’s former bosses
have already received criminal convictions, and the investigation has turned
up seedy details including land purchased from the wrong owner, leased
sports cars that were never delivered, and a missing yacht that was later
found, abandoned, with North Korean currency aboard.
The small bank’s downfall has cost the governments of Austria and Germany
$11.93 billion so far. Now, Austria’s plan to wind down the nationalized
bank has set Vienna up for a new struggle with former investors, including a
Bavarian bank that bought it in 2007 and one of the hedge funds that
recently pushed Argentina to default.
Going Concern Trouble Disclosures are Management's Responsibility
From the CFO Journal's Morning Ledger on August 28, 2015
New accounting rules in the U.S. are going to hold
corporate managers’ feet to the fire over disclosures regarding the ability
of businesses to continue to fund their operations,
CFOJ’s Emily Chasan and Maxwell Murphy report.
The Financial Accounting Standards Board’s updated
rules, effective by the end of 2016, will force executives to disclose
serious risks even if management has a credible plan to alleviate them.
Previously there were no specific rules under
Generally Accepted Accounting Principles and disclosures were mostly up to
the auditors. But supporters of the changes argued that corporate managers
have better information about a company’s ability to operate as a “going
concern” than auditors.
Only about 40% of companies that filed for bankruptcy
in the past two decades have explicitly disclosed the possibility that they
could cease to operate before running into trouble, according to a recent
study from Duke University’s Fuqua School of Business.
Abstract:
Over the past decade, the Big 4 public accounting firms have steadily
increased the proportion of their revenue generated from consulting services
(consulting revenue hereafter), primarily from nonaudit clients. Regulators
and investors have expressed concerns about the potential implications of
accounting firms’ expansion of consulting services on audit quality. We
examine the associations between Big 4 audit firm consulting revenue and
various measures of audit quality, including auditor going concern reporting
errors, client misstatements, and client probability of meeting or just
beating analyst earnings forecasts. Overall, our results suggest that a
higher proportion of firm-level consulting revenue is not associated with
impaired audit quality for the Big 4 firms. However, results of earnings
response coefficient tests suggest that investors perceive a deterioration
of audit quality when a higher proportion of the firms’ revenue is generated
by consulting services.
Jensen Comment
Given the repeated deficiencies in Big Four audits as reported in PCAOB
inspection reports year after year perhaps cost cutting is more of a problem in
Big 4 audit professionalism than independence. In some cases the Big Four firms
are flagged for poor audit supervision of inexperienced staff auditors. In most
instances, however, the problem is one of failure to do enough detail testing.
Corporate Tax Inversions: The Beautiful and the Ugly
From the CFO Journal's Morning Ledger on August 27, 2015
More corporate finance divisions are looking into the
details of what an inversion would actually do for their tax bill, even if
their companies ultimately aren’t willing to take the plunge and decamp for
a foreign country,
CFOJ’s Emily Chasan reports.
A foreign domicile often will mean a lower overall tax
rate, but a thorough analysis must also factor the cost of moving some
management overseas, reorganizing the company, the sustainability of a move
and its political consequences.
And the political consequences, though at this point
mostly limited to accusations of unpatriotic behavior, could become more
serious if legislators make good on their threats. The Treasury Department
is currently
reviewing its options for limiting the tax benefits
of an inversion. And since
Burger King Worldwide Inc. announced its intention
to relocate to Canada through a merger with
Tim Hortons Inc.,
the iconic burger chain has come under direct criticism from lawmakers. Sen.
Dick Durbin (D., Ill.) said, “I’m disappointed in Burger King’s decision to
renounce their American citizenship” and added that “with every new
corporate inversion, the tax burden increases on the rest of us to pay what
these corporations won’t.” The companies say the deal is not about taxes,
but about growth (more on that below).
But the Burger King deal highlights what chief
financial officers are learning in their investigations of inversion deals:
that the tax benefits are not so straightforward, and often lurk in the
details. Writing for Heard on the Street, John Carney notes that
Canada offers a generous tax break
for profits from countries with which it has a tax treaty. These get counted
as “exempt surplus,” which isn’t taxed at all by Canada. And in some of
Burger King’s fastest-growing markets, a Canadian domicile would also give
it the benefit of “tax sparing”—a system that credits companies even for
taxes that aren’t actually paid as part of a complex incentive to invest in
developing countries.
Whopper Deal --- Burger King Headquarters May Move to Canada: There are
tax savings in addition to a purchase of Canada's Tim Horton's Inc.
From the CFO Journal's Morning Ledger on August 25, 2015
The inversion wave that overtook the pharmaceutical
and drug retail industries continues to spread, and now one of America’s
most storied hamburger chains is looking to decamp for a lower-tax domicile
to the north.
And despite the saber-rattling from American lawmakers
who fear that such moves will drain U.S. tax coffers, Burger King is
planning to make the move without the protection of a provision that would
let it walk away from the deal even if the tax benefits are taken away
through new legislation. That may suggest that American big business
perceives the U.S. government as unwilling, or incapable, of making any
serious moves to restrain inversions.
“Some people are calling these companies ‘corporate
deserters.’ ”
That is what President Obama said last month about
the recent wave of tax inversions sweeping across corporate America, and he
did not disagree with the description. But are our nation’s business leaders
really so unpatriotic?
A tax inversion occurs when an American company
merges with a foreign one and, in the process, reincorporates abroad. Such
mergers have many motives, but often one of them is to take advantage of the
more favorable tax treatment offered by some other nations.
Such tax inversions mean less money for the United
States Treasury. As a result, the rest of us end up either paying higher
taxes to support the government or enjoying fewer government services. So
the president has good reason to be concerned. Continue reading the main
story Related Coverage
Walgreen on Wednesday said it would take over the
British pharmacy retailer Alliance Boots but would not, after all, move its
headquarters overseas to save on taxes. Tax Reform: Inverting the Debate
Over Corporate InversionsAUG. 6, 2014
Yet demonizing the companies and their executives
is the wrong response. A corporate chief who arranges a merger that
increases the company’s after-tax profit is doing his or her job. To forgo
that opportunity would be failing to act as a responsible fiduciary for
shareholders.
Of course, we all have a responsibility to pay what
we owe in taxes. But no one has a responsibility to pay more.
The great 20th-century jurist Learned Hand — who,
by the way, has one of the best names in legal history — expressed the
principle this way: “Anyone may arrange his affairs so that his taxes shall
be as low as possible; he is not bound to choose that pattern which best
pays the treasury. There is not even a patriotic duty to increase one’s
taxes.”
If tax inversions are a problem, as arguably they
are, the blame lies not with business leaders who are doing their best to do
their jobs, but rather with the lawmakers who have failed to do the same.
The writers of the tax code have given us a system that is deeply flawed in
many ways, especially as it applies to businesses.
The most obvious problem is that the corporate tax
rate in the United States is about twice the average rate in Europe.
National tax systems differ along many dimensions, making international
comparisons difficult and controversial. Yet simply cutting the rate to be
more in line with norms abroad would do a lot to stop inversions.
A more subtle problem is that the United States has
a form of corporate tax that differs from that of most nations and doesn’t
make much sense in the modern global economy.
A main feature of the modern multinational
corporation is that it is, truly, multinational. It has employees, customers
and shareholders around the world. Its place of legal domicile is almost
irrelevant. A good tax system would focus more on the economic fundamentals
and less on the legal determination of a company’s headquarters.
Most nations recognize this principle by adopting a
territorial corporate tax. They tax economic activity that occurs within
their borders and exclude from taxation income earned abroad. (That
foreign-source income, however, is usually taxed by the nation where it is
earned.) Six of the Group of 7 nations have territorial tax systems.
Continued in article
Hi again Richard,
Perhaps you can clear up my misunderstanding of how large LLP partnerships may
be taxed as corporations in the U.K.
We’ve also got a second, related problem, which I
call the “never-heres.”
They include formerly private companies like Accenture ACN 0.17% , a
consulting firm that was spun off from Arthur Andersen, and disc-drive maker
Seagate STX , which began as a U.S. company, went private in a 2000 buyout
and was moved to the Cayman Islands, went public in 2002, then moved to
Ireland from the Caymans in 2010. Firms like these can duck lots of U.S.
taxes without being accused of having deserted our country because
technically they were never here. So far, by Fortune’s count, some 60 U.S.
companies have chosen the never-here or the inversion route, and others are
lining up to leave.
From the CFO Journal's Morning Ledger on August 26, 2015
More accounting deficiencies linked to inventory Taxes have long been a top accounting bugaboo, but keep an eye on
the inventory, reports
CFOJ’s Maxwell Murphy.
Large companies disclosed deficiencies in their
procedures to account for inventory, vendors and cost of sales 38 times last
year, putting the category just behind tax. In 2012, inventory ranked third
on the list and was sixth as recently as 2011, according to Audit Analytics.
Two Teaching Cases Featuring Proposed Major Differences (FASB versus IASB)
in Lease Accounting
IASB Says the Tentative FASB Lease Accounting Model is Too Complicated
From the CFO Journal's Morning Ledger on August 11, 2014
About $2 trillion in off-balance sheet leases needs to
be brought onto companies’ books, U.S. and international rule makers agree.
But that’s about where the agreement ends. When the final version of their
lease accounting overhaul arrives next year, it’s likely to involve
different models for lease expensing, creating a potential headache for
corporate financial staff in applying the divergent rules.
The U.S. Financial Accounting Standards Board plans to
stick with its proposed dual model for lease accounting, which treats some
leases as straight-line expenses and others as financings. But the
International Accounting Standards Board said last week that it has
tentatively decided to go with just one model for all lease expenses,
because it views the FASB’s plan as too
complicated,
CFOJ’s Emily Chasan reports.
But it’s also possible that the differences won’t be
too difficult to reconcile. “While it looks like we won’t have one complete
joint solution in the end, the actual impact of the differing models over
time may not be as dramatic as one might first think,” said Nigel
Sleigh-Johnson, head of the Institute of Chartered Accountants of England
and Wales’ financial reporting faculty.
Teaching Case
From The Wall Street Journal's Weekly Accounting Review on March 21, 2014
SUMMARY: On
Tuesday and Wednesday, March 18 and 19, 2014, the U.S.
Financial Accounting Standards Board (FASB) and London-based International
Accounting Standards Board (IASB) met to further their "aim to issue a final
standard later this year that would move about $2 trillion dollars of lease
obligations onto corporate balance sheets." According to the article, their
differences have to do with the amortization of the lease cost into the
income statement: straight-line presentation of the rental cost in the
income statement or presentation as a long-term financing of an asset which
involves depreciation expense and interest expense on the lease obligation.
The former treatment is argued to be more appropriate for, say, storefront
rental leases. The latter system can show higher expenses in the early years
of a lease obligation.
CLASSROOM APPLICATION: The article is an excellent one to introduce
impending changes in lease accounting in financial accounting classes.
QUESTIONS:
1. (Advanced) Summarize accounting by lessees under current
reporting requirements.
2. (Advanced) How do current requirements lead to lack of
comparability among financial reports? How do they result in financial
statements which often lack representational faithfulness? In your answer,
define the qualitative characteristics of comparability and representational
faithfulness.
3. (Introductory) Summarize the two proposed methods of accounting
for all leases as described in this article. Identify a timeline over which
these proposals have been made.
4. (Introductory) Summarize company reactions to these proposed
accounting changes.
5. (Advanced) Are company arguments and reactions based on
accounting theory? Support your answer.
Reviewed By: Judy Beckman, University of Rhode Island
U.S. and international rule makers remained divided
Tuesday in the first of two days of meetings aimed at resolving differences
on lease accounting.
The U.S. Financial Accounting Standards Board and
London-based International Accounting Standards Board aim to issue a final
standard later this year that would move about $2 trillion dollars of lease
obligations onto corporate balance sheets. But they are still split on the
fundamental model companies should use to measure those liabilities.
“We have been struggling with this standard for
many years,” Hans Hoogervorst, chairman of the IASB said at the meeting in
Norwalk, Conn. “There is no simple answer.”
The major difference is whether to restrict
companies to one method to account for leases, or to let them choose between
two. The debate will continue Wednesday.
Since 2005, the Securities and Exchange Commission
has recommended an overhaul of lease accounting because large off-the-books
lease obligations can obscure a company’s true finances.
Under current rules, lease accounting is based on
rigid categories that let companies keep operating leases for items such as
airplanes, retail stores, computers and photocopiers off the books,
mentioning them only in footnotes. In other cases, where the present value
of lease payments represents a very large portion of the asset’s value, they
are called capital leases and treated more like debt.
In their efforts to revamp the rules, accounting
standard setters have gone back to the drawing board several times. In 2010,
they proposed a method aimed at bringing leases on-the-books by categorizing
them as “right of use” assets, which would treat them like financings.
Companies pushed back, claiming it would be costly
to implement and could unnecessarily front-load lease expenses.
So the rule makers agreed to compromise in 2012 on
a two-method approach: The first would let companies treat some leases like
financings, such as when a company can purchase the asset at the end of a
lease. The second would treat other leases as straight-line expenses, such
as rental payments for retail storefronts.
That move also drew criticism from analysts, who
were concerned they wouldn’t get comparable financial information because
the choice would be left up to companies.
On Tuesday, some board members said they preferred
to return to the “right of use” approach because they think the compromise
is weak. Others were in favor of the two-method approach because it would be
easier to implement.
The dual method approach is the “more operational
one, at least initially,” said FASB Vice Chairman Jim Kroeker.
To speed a resolution, the boards also generally
agreed to eliminate potential changes to lessor accounting from the
proposal.
The boards had received feedback from investors and
analysts that the current lessor model works well and that changes could
result in more work.
Continued in article
Teaching Case
From The Wall Street Journal's Weekly Accounting Review on August 15, 2014
SUMMARY: U.S. and international accounting rule makers are getting
closer to a final version of their long-awaited lease accounting overhaul,
but the two boards are unlikely to use the same lease expensing model in
their final rules. The London-based International Accounting Standards Board
published an update saying it has tentatively decided to propose a single
model for lease expenses, rejecting a 2013 compromise with the U.S.
Financial Accounting Standards Board for a dual model amid concerns that it
is too complex.
CLASSROOM APPLICATION: This article is a good update regarding
accounting for leases.
QUESTIONS:
1. (Introductory) What is FASB? What is IASB? What do they have in
common? How do they differ?
2. (Advanced) What are the current rules regarding accounting for
leasing? Will this be changing? If so, how?
3. (Advanced) Why do some parties take issue with the current model
of accounting for leases? Do you agree that this is a problem? Why or why
not?
4. (Advanced) What is the reasoning behind the idea that there is
no real difference between the FASB and IASB methods? Do you agree?
Reviewed By: Linda Christiansen, Indiana University Southeast
U.S. and international accounting rule makers are
getting closer to a final version of their long-awaited lease accounting
overhaul by next year, but the two boards are unlikely to use the same lease
expensing model in their final rules.
The London-based International Accounting Standards
Board this week published an update saying it has tentatively decided to
propose a single model for lease expenses, rejecting a 2013 compromise with
the U.S. Financial Accounting Standards Board for a dual model amid concerns
that it is too complex.
FASB has tentatively decided to retain the dual
model, because it believes it better reflects the economics of different
types of leases, such as real estate and equipment leases. The models may
not result in significant financial differences, but it could have big
operational differences for corporate financial staff applying the
standards, industry analysts say.
The primary goal of the joint lease accounting
overhaul has long been to push companies to bring about $2 trillion in
off-balance sheet leases onto the books. Investors complain that today’s
off-balance sheet leases obscure a company’s true liabilities, and that they
often have to adjust calculations to include these expenses. Off-balance
sheet leases may be understating the long-term liabilities of companies by
20% in Europe, by 23% in North America, and by 46% in Asia, according to
IASB research.
But the overhaul has been delayed by disagreements
over how companies should measure leased assets and liabilities.
The IASB’s single model would treat all leases like
financings, requiring companies to recognize a so-called “right of use”
asset and amortize it over time. FASB’s dual model would treat some leases
like financings, such as when a company has the option to purchase equipment
at the end of a lease term, and treat other leases, such as store rental
payments, as straight-line expenses.
“While it looks like we won’t have one complete
joint solution in the end, the actual impact of the differing models over
time may not be as be dramatic as one might first think,” said Nigel
Sleigh-Johnson, head of the Instituted of Chartered Accountants of England
and Wales’ financial reporting faculty.
The real estate industry has primarily been
concerned that the single financing model for lease accounting would force
them to front-load lease expenses. But when companies include the additional
lease service components or tenant improvements into the straight-line
expensing model, the final result is often similar to the financing model,
according to a study of dozens of real-world leases earlier this year by
leasing firm LeaseCalcs LLC.
“In practice, the difference in the IASB and FASB
positions is expected to result in little difference,” the IASB said in its
update.
Jensen Comment
Neither the FASB nor the IASB will ever make headway with short-term lease
accounting rules until they factor in probabilities of lease renewals.
Jensen Comment
I never met a person who, after a close encounter with Bob Herz, did not really
like Bob Herz. I had only one encounter when Bob was still a partner with PwC
and one encounter when Bob was Chairman of the FASB. Both times I can away
better informed and entertained by his clever wit (truly like Will Rogers) and
humble style (also like Will Rogers).
I wish somebody who knew Bob Herz better than me would write a Wikipedia
module about him.
The module below appears under the Book Review Section of The Accounting
Review,
Volume 89, Issue 4 (July 2014)
http://aaajournals.org/doi/full/10.2308/accr-10398
Since the Book Review Section is free to the public, I quoted the entire module
below:
BOB HERZ, Accounting Changes: Chronicles of Convergence, Crisis,
and Complexity in Financial Reporting (No place: AICPA, 2013,
ISBN 978-1-93735-210-3, pp. xx, 268).
FLOYDNORRIS
Chief Financial Correspondent The New York Times
Robert H. Herz always seemed like the Will Rogers
of the accounting world. He sounded down to earth even when discussing
arcane accounting rules, and he appeared to get along with everybody,
even those who did not get along with him.
Then he quit.
In 2010, he suddenly stepped aside as chairman
of the Financial Accounting Standards Board, with two years left in his
second term. If he had previously mentioned to anyone he was thinking of
such a step, that person has yet to mention it publicly.
Was he pushed? He insisted the departure was
his choice.
Was he angry over the congressional upbraiding
he had suffered the year before, when it became clear that the
congressmen who planned the “hearing” had no interest in hearing his
views, only in assuring he heard and obeyed the demand of the banks that
the Board back away from fair value accounting enough to let the banks
look as healthy as they wished to appear?
If you long to hear the inside story of his
sudden retirement, or to hear what he really thought of the people who
forced the Board's rapid retreat after that congressional circus, Herz's
memoir, Accounting Changes: Chronicles of Convergence, Crisis and
Complexity, is not the place to turn.
If, unlike Rogers, he ever met a man he did not
like, that man is left out of the book.
Start with the story of the congressional
lynching. He chooses to remember comments from the one congressman who
showed any sympathy to the Board's position.
Over the next few weeks, the Board rushed out
changes to the accounting rules that he defends.
The principal change enacted then enabled banks
to treat impaired securities as being worth more than they were, at
least for earnings purposes, while the rest of the impairment was put in
“other comprehensive income.” This was a classic accounting rule-maker
approach, one that I wish Mr. Herz would have discussed in more detail.
In it, those who have gained political support forcing rule-makers to
back down get what they said they wanted—avoiding a hit to earnings—but
are forced to disclose the unfortunate truth to those who are willing to
read the footnotes.
Instead, he makes it sound like helping out the
banks was a byproduct of a perfectly reasonable decision, albeit one
that was rushed through in record time.
Although not one of our
specific goals in establishing this approach, an important practical
effect of it for the banks was to take some pressure off their
regulatory capital because only the portion of the impairments in
debt securities relating to credit would now be charged to
regulatory capital. (p. 175)
As for his departure from the Board, he simply
reprints an interview with The CPA Journal. “It was time to move
on,” he says (p. 238).
He is a little more inclined to discuss what
was probably the single biggest mistake of his tenure: the failed
attempt to deal with special purpose entities in the aftermath of the
Enron scandal. The Board's narrow solution set the stage for later—and
much larger—abuse by the banks.
“Knowing what I know now about how the use of
this device was sometimes stretched and became an important element in
the growth of the ‘shadow' banking system leading up to the financial
crisis,” he writes, “I would certainly have worked to eliminate it from
the standards much earlier” (p. 249). That episode, he says, “serves as
an example of the perils of creating exemptions that grant highly
coveted financial reporting outcomes.”
Herz is more interesting when discussing his
early life and career. He grew up in New Jersey and Argentina, where his
maternal grandparents lived and where his father was transferred when he
was 14. He chose to go to college at the University of Manchester in
Britain, and went to work for Price Waterhouse in Manchester after he
graduated in 1974, and later moved to the United States, where he ended
up at Coopers & Lybrand.
The result was a highly unusual résumé for a
young accountant, one that required him to know both British and
American accounting rules, something that would serve him well as he
became the top technical partner for the merged PricewaterhouseCoopers
and a part-time member of the International Accounting Standards Board
before leaving both jobs to take over the FASB in 2002.
Early in his career he had a job at Coopers
that perhaps should be mandatory for those who would write accounting
rules. In what he calls his “Bad Bob” years, his job in the firm's
corporate finance advisory service involved finding ways around
accounting rules to inflate profits.
He writes, “my experiences in transaction
structuring taught me that the areas that were most ripe for designing
transactions and arrangements to achieve desired accounting outcomes
were those where the accounting rules departed from basic principles of
economics and finance and areas where, because of the detailed
requirements and many exceptions and bright lines present in the
accounting rules, minor changes in the form of a transaction or
arrangement could produce a large change in the resulting accounting
treatment” (p. 13).
That sounds like a plea for a “principles
based,” rather than “rules based” set of accounting standards, something
Herz says he would like. But he seems resigned to the idea such a system
would not work in the United States, due in part to what he called, in a
2004 speech, the “real fear of being second-guessed by regulators,
enforcers, the trial bar, and the business press” (p. 207). Whatever
they say, he writes, companies and accountants often want “detailed
rules, bright lines, and safe harbors” (p. 209).
It turns out that Herz really is what he always
seemed to be: a nice guy with a sense of fair play. That does not help
the book much. He goes out of his way to explain all sides of some
accounting issues, without necessarily making clear his own opinions.
His memoir does an excellent job
of making some complicated accounting issues accessible. But it would be
nice if the author were not so nice to those who opposed—and ultimately
defeated—some of his efforts.
August 18, 2014 reply from Tom Selling
Hi, Bob:
Thanks for forwarding this. I want to share a
couple of reactions to your observations and to Floyd’s review:
I consider myself fortunate to have interacted with
Bob Herz on a handful of occasions. One of the most memorable was when he
called me to clarify his views about one of my earliest Accounting Onion
postings. I don’t even remember which post it was. I was still pretty new to
blogging, and Herz didn’t call to complain, only to clarify. As you said,
Bob, he was extremely patient and cordial. One thing we did agree on, I
remember, is a preference for the IFRS impairment model for long-lived
tangible assets over U.S. GAAP. I still smart from the invective that Denny
Beresford directed toward me via a post to AECM (“outrageous and unsupported
assertions,” and more) after I published my view that Herz did not resign of
his own accord. (If anyone is interested, see here.) I took a measure of
satisfaction reading that Floyd is as skeptical as I continue to be about
the stated reasons for Bob having suddenly departed the FASB. Floyd focuses
on the loan measurement controversy, and he also recently published a column
in the NYT on the topic. His NYT piece was much more charitable to the
anti-fair value forces than the book review. It’s available here: Why a Rule
on Loan Losses Could Squeeze Credit. Related to that last bullet point,
Floyd quotes Bob Herz: “My experiences in transaction structuring taught me
that the areas that were most ripe for designing transactions and
arrangements to achieve desired accounting outcomes were those where the
accounting rules departed from basic principles of economics and finance…”
Evidently, Bob Herz —unlike Bob Jensen— is no defender of historic cost.
Based on comments to me by others closer to the FASB at the time, I think
that Bob Herz was coming around to the measurement approach that I favor,
replacement cost, just before he departed from the FASB. Given that FAS 157
had already been promulgated, I imagine that there was no way that the FAF
could have abided the shift in thinking toward the “the basic principles of
economics and finance."
I should have done so earlier, but I will be
purchasing a copy of Bob’s book tonight. I very much look forward to reading
it
Best,
Tom
August 18, 2014 reply from Dennis Beresford
Tom,
I’m sorry that you still smart from the “invective”
I directed toward you re: Bob Herz’ resignation from the FASB. For the
record, the definition of invective that popped up on my email program is
“the harsh denunciation of some person or thing in abusive speech or
writing, usually by a succession of insulting epithets.” Suggesting that you
had made what I called “outrageous and unsupportable assertions” about such
a serious matter can hardly be called, in my opinion, abusive speech or a
succession of insulting epithets. Neither then nor now has there been any
evidence of which I am aware that Bob’s decision to leave the FASB was other
than a completely voluntary action by him. I urge that you be more careful
about your choice of word selection in future postings.
I have actually read Bob Herz’ book and I recommend
it highly to anyone who wants to understand more about the politics of the
standard setting process and much of the day to day activity. However, as
Floyd Norris observes, Bob doesn’t really break much new ground and
certainly doesn’t disclose any “Deep Throat” type information or enemies
list that wouldn’t have already been obvious. As Floyd states (and as you,
Tom, agree) Bob is just too nice a guy to write that kind of book.
I interacted with Bob in many professional
capacities before, during, and after my time at the FASB so our relationship
goes back at least 30 years. I always found him to be the consummate
professional – extremely bright on accounting matters but also a
well-rounded business person. And he has a wonderful sense of humor. While
all of these interactions were positive, I most enjoyed the year in which
Bob and I overlapped on the board of directors of Fannie Mae. I chaired the
Audit Committee and he was a new member of the board and of the Audit
Committee. He “hit the ground running” as both a board member and Committee
member and made a great contribution. But he was able to do so in a
constructive way that didn’t bruise any egos of board members or senior
management who had been working hard to deal with extremely challenging
issues long before he got there. In summary, he was a joy to work with.
The international accounting standards setter has
set up the group to support stakeholders in adopting the new reporting
standard, which forces banks to take a forward view of losses incurred from
bad debts.
The 12-strong panel includes members of the Big
Four, along with representatives from Barclays, Bank of China and Deutsche
Bank. A full list can be seen here.
Last month, the IASB replaced its discredited
incurred-loss model in favour of a forward-looking impairment model that
requires banks and financial institutions to provision for bad loans much
earlier under changes to IFRS accounting rules that will force organisations
to better accurately represent their financial health.
The new model will create challenges for preparers
of accounts, particularly because of the increased need for judgement. For
instance, a major issue for banks and investors will be how adoption of the
new standard will affect regulatory capital ratios. Banks will need to
factor this into their capital planning and users are expected to look for
information on the expected capital impacts.
The objective of the Impairment Transition Resource
Group is to provide a forum for stakeholders to discuss emerging
implementation issues arising from the new impairment requirements. The
group will also provide information that will help the IASB to determine
what, if any, action will be needed to resolve such diversity, although it
will not itself issue guidance.
Meetings will be observed by regulatory bodies
including members of the Basel Committee on Banking Supervision.
The IASB expects that the group will meet
approximately two to three times a year, depending upon the volume and
complexity of the issues raised. The first meeting is planned for the last
quarter of 2014, with details to be announced in due course. All meetings
will be public and chaired by IASB member Sue Lloyd.
Jensen Comment
One issue of loan impairment is that moving threshold where statistical
prediction of bad debts gives way to an evaluation of each debtor. For example,
predicting bad debt losses of millions of bad debts in each aging category of
accounts receivable at Sears is a statistical estimation problem where
individual accounts are not individually analyzed and compared for impairment
prediction. The IASB's Impairment Transition Resource Group is more concerned
with banks and other lenders having fewer very large investments that must be
individually evaluated such as investments in a particular class of Argentina's
long-term bonds.
The huge problem facing the Impairment Transition Resource Group is in
achieving some sort of consistency between financial statements of lenders
regarding loan impairment adjustments. As with most any principles-based
judgment taking the place of a bright-line rule, there is great risk of
inconsistencies between firms: Bright Lines Versus Principles-Based Rules ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines
For example, given identical loan contracts such as a class of Argentina
bonds, the IASB's new ruling faces a high probability that one company and its
auditors may account for the contracts differently than another company and its
auditors (even though the audit firm is the same for the two different
companies).
A company with a high ratio of assets to
liabilities should, in theory, be better placed to service its debts than
one with fewer assets supporting its obligations. However, the balance sheet
– the primary record of an entity’s assets and liabilities – is rarely
employed by credit analysts as a standalone indicator of credit risk.
The three main shortcomings which limit its
usefulness are that:
Under the historical cost accounting
convention, the amounts shown on the asset side are unlikely to be a
good proxy for the real value of the entity’s resources;
Leased assets, and the related obligation to
pay the lease rentals, are mostly off balance sheet; and
Pension obligations are not reported
consistently.
However, these obstacles are not completely
insurmountable because:
The value of the assets can be estimated by
reference to the earning power of the business;
Off-balance-sheet leased assets can be
factored in using either a multiple of the lease expense, or the
estimated present value of the obligation to pay the lease rentals; and
Inconsistencies in the reporting of pension
obligations can be rectified by including the actuarially-estimated
defined benefit obligation as a liability, and by transferring pension
assets to the asset side of the balance sheet where appropriate.
Using Western Europe’s 10 largest telecoms
operators as an example, this report shows that it is possible to construct
a metric – the ratio of total assets Go total liabilities – which not only
correlates nicely with our credit ratings for the telcos concerned, but also
provides additional insight into the strength of their balance sheets.
However, the adjustments required are not entirely robust, and Moody’s will
continue to focus on metrics which compare the cash generating capability of
the entity with the level of its debt.
Continued in article
Jensen Comment
Some of the underlying faults are being corrected such as OBSF lease
obligations. I would say that a much more overwhelming inability of accountants
to deal with intangibles and contingencies ---
See below
Jensen Comment
The highest rate of decline in is "fallers" who cut down trees for paper,
lumber, and energy uses. For a few days I watched lumberjacks at work cutting
down a few acres of timber across from our cottage. I don't think the
lumberjacks even owned a chain saw or an axe. They moved in about $3 million
worth of logging machinery, including the cutting machine that downs the trees
and the chipping machine that swallows up whole trees (sometimes three or four
or more trees at a time) and fills an 18-wheel truck with wood chips in about 40
minutes on average. The trees themselves are untouched by the lumberjacks
running the big machinery. The wood chips were hauled off to a power plant in
nearby Whitefield, NH.
"Discussing (Revenue) Variance Analysis with the Performance of a
Basketball Team," by William R. Strawser and Jeffrey W. Strawser, Issues in
Accounting Education, August 2014 ---
http://aaajournals.org/doi/full/10.2308/iace-50671
This article is not a free download, but I think, like most AAA journal
articles, I think it can be distributed free to current students in accounting
courses.
ABSTRACT:
While current cost and managerial
accounting texts devote extensive coverage to comparisons of actual and
expected costs, relatively scant attention is devoted to analyzing
comparable differences in revenues. Methods commonly used to identify
differences between actual and expected revenues include the calculation of
variances such as the sales price (SPV), sales quantity (SQV), and the sales
mix (SMV) variances. We decided to approach the discussion of these
variances in an innovative setting by presenting the SQV and SMV in the
context of analyzing the performance of a basketball team, providing a
setting that is both appropriate and interesting for illustrating revenue
variances. Also, there are trade-offs in the choice between two of these
“revenue” sources, for example, should the shooter attempt a two- or a
three-point shot? Other relevant questions propel the decomposition of the
SQV into the market size (MSV) and market share (MShV) variances. Was the
game an offensive showdown, tallying numerous shots, or a defensive
lock-down with relatively few shots? How effective was the team in
controlling the ball and scoring a dominant proportion of shots? Feedback
from students indicates that this illustration provides an interesting and
comprehensive discussion of revenue variances. Using this and similar
settings, a better understanding of quantity and mix variances, and the
impact of these variances on improving performance, may be obtained.
PS
Except for the Strawser and Strawser article, the teaching cases in IAE for
August 14, 2014 are devoted to famous recent frauds ---
http://aaajournals.org/toc/iace/current
Satyam Fraud: A Case Study of India's Enron by
Veena L. Brown, Brian E. Daugherty and Julie S. Persellin
Grand Teton Candy Company: Connecting the Dots in a
Fraud Investigation by Carol Callaway Dee, Cindy Durtschi and Mary P. Mindak
Blurred Vision, Perilous Future: Management Fraud
at Olympus by Saurav K. Dutta, Dennis H. Caplan and David J. Marcinko
The new revenue recognition standard issued by the FASB and the IASB creates
a comprehensive source of revenue guidance for all entities in all
industries. Our Technical Lines consider certain implications for the
following industries:
Prosecutors announced that Gabriel Bitran, a former associate dean
at Massachusetts Institute of Technology’s
Sloan School of Management, has agreed to plead
guilty to criminal charges of conspiracy to commit fraud for using a hedge fund
to secretly funnel investors’ cash into Bernard Madoff’s Ponzi scheme. His
son, Marco, will also plead guilty in the case. Bitran’s misdeeds were made
public as early as 2009, yet he stayed on Sloan’s faculty until 2013.
Bitran and his son paid almost $5 million in April 2012 to settle
Securities and Exchange Commission charges that they lied to investors. Years
earlier, a
Reuters reportdetailed his fund’s involvement in
the Madoff scheme. Bitran remained on Sloan’s staff until he retired in January
2013, teaching classes on operations and management. His lawyer did not return a
call seeking comment.
The elder Bitran was sued unsuccessfully in 1992 for sexual
harassment by a woman who worked as an assistant in his office on Sloan’s
campus. While her case failed, the decision spurred widespread protest and
prompted the school to overhaul its policies on such incidents.
"Lessons from an $8 million fraud: What the criminal was thinking
and what can be done to prevent or uncover similar crimes," by Mark J.
Nigrini, Ph.D. and Nathan J. Mueller, Journal of Accountancy, August 2014
---
http://www.journalofaccountancy.com/Issues/2014/Aug/fraud-20149862.htm
In hindsight, it
seems obvious: Nathan J. Mueller’s pilfering of financial services giant ING
should have never been allowed to start, much less last as long as it did.
First, it was an
accident that gave Mueller, an employee in ING’s reinsurance division, the
authority to approve company checks of up to $250,000.
Then, the check his
credit card company returned to ING could have exposed his theft in the
first year, but the accounts payable department simply returned the check to
him.
Finally, the
evidence that he was living far beyond his means—the expensive cars and
watches, the lavish nightlife, the frequent trips from Minnesota to Las
Vegas—could have raised a few eyebrows among his co-workers, but nobody
voiced any concerns for years.
In the end, Mueller
embezzled nearly $8.5 million from ING over four years and three months.
When he was caught, he was sentenced to 97 months in prison—a term that he
began in February 2009 at the Federal Prison Camp in Duluth, Minn.
Why should anyone
care about Nathan J. Mueller? His case is noteworthy because of the millions
of dollars involved and the length of time that his scheme went undetected
and because his scheme was made possible by a breach of controls. This
article describes the fraud in Mueller’s own words and examines the lessons
learned with strategies for management on how to prevent and detect similar
schemes.
THE PATH TO
ING
Mueller grew up in a
small town in south central Minnesota. A high school friend remembers that
Mueller was popular in school, decent at athletics, and competent at his
schoolwork, and that he liked to play rap music “pretty loud in his car”
whenever he could. The friend also remembers that Mueller’s family was
always on a tight budget and that Mueller didn’t like living that way.
Mueller attended a
private liberal arts college and graduated with an accounting degree in
1996. He enjoyed the inner workings of accounting systems, and in 2000 he
found himself part of ING after his employer, life insurance company
ReliaStar, was acquired for more than $6 billion.
Mueller played a
lead role in transitioning his old employer onto a new enterprise resource
planning (ERP) system. A mistake by his new employer created an opportunity
for Mueller to steal company funds. In the next section of the article,
Mueller describes the fraud scheme in his own words.
WE OFTEN
LOGGED ON AS SOMEONE ELSE
As a part of the
changeover team, I became an expert on all aspects of the ERP system
including financial reporting, journal entries, and, most importantly,
checks and wire payment processing. I was also, by mistake, along with a
co-worker, given the authority to approve checks up to $250,000. I
discovered this permission quite by accident some two years after the
takeover.
Our accounting department consisted of a controller, assistant controller,
accounting manager (me), and three people under me. Together with a
co-worker (CW) and a subordinate (SUB), I was one of three of us in my
division who could request checks. CW and I also could approve checks. In
our small accounting department, we knew everyone else’s system passwords.
This was a practical workaround for when we needed to get something done
when someone was out of the office. We often logged on as someone else to
get the job done. One morning, while sitting at my desk, I realized that I
could log in as someone else, request a check, and then log in as myself and
approve my own request. I went to work every day for the next year tempted
by the pot of gold that was there for the taking.
PA
reaches membership milestone The AICPA
announced Tuesday that its membership has eclipsed the
400,000 mark. The accounting profession's largest membership organization
worldwide has seen its number of members grow by more than 70,000 since
2005. Watch AICPA President and CEO Barry Melancon, CPA, CGMA, reflect on
this exciting achievement and what it means for members in this
short video.
Journal of Accountancy online
(8/19)
Jensen Comment
Robots are replacing skilled and well as unskilled workers. For example, welding
and surgery are popular areas for robotics, although the nature of the robotics
may differ. Specialty surgeons in rural areas may be replaced by robots
controlled by highly skilled surgeons in urban specialty hospitals. Specialty
welders on a factory floor may be replaced by robots that are not controlled by
skilled welders.
The advantages of robots in surgery include allowing surgeons to do more
surgeries per day and allowing specialty surgeries in remote locations that do
not attract as many specialty surgeons. There are of course medial risks, and
general surgeons must be present when the surgeries are being performed to cover
emergencies such as hemorrhaging.
The advantage of robots in welding are primarily operating leverage where
variable labor costs (wages and benefits) are eliminated by adding fixed costs.
Also robots are not as subject to labor strife, although unions often influence
the extent to which their members can be replaced by robots. Concessions are
often made for for troubled factories on the verge of being closed down if
variable costs are not reduced. Robots may allow some skilled workers to remain
employed with high wages and benefits. For example, robots may allow factories
in the USA to compete with less costly labor in Mexico and Asia.
From PwC IFRS news - July/August 2014 ---
Click Here
Abstract:
In a competitive environment, accurate costing information is crucial for
every business including manufacturing and service firms, fishing and
farming enterprises, and educational institutions. The Activity-Based
Costing (ABC) system, argued to be superior to the traditional volume-based
costing system, has increasingly attracted the attention of practitioners
and researchers alike as one of the strategic tools to aid managers in
better decision making. The benefits of the ABC system and its impact on
corporate performance have motivated numerous empirical studies on ABC; it
is considered to be one of the most-researched management accounting areas
in developed countries. China, an emerging market with a growing rate of
manufacturing industries, is no exception, as ABC entered China as a choice
for an innovative accounting system. Previous research on ABC conducted in
China examined pertinent issues related to ABC implementation, such as the
levels of ABC adoption in various countries, the reasons for implementing
ABC, the problems related to ABC and the critical success factors
influencing ABC. In their case studies, several authors declared ABC
implementation to be successful, but many have been reluctant to support
this seemingly novel system for many reasons. This paper reviews 48 research
studies on ABC carried out within the past decade in China, both case
studies and questionnaire-based research, from 2000 to 2013. We found that
ABC has been adopted in most manufacturing firms, many of which claim
success in cost reduction and performance improvement since its
implementation; in some service corporations, especially in logistics and
hospitals; and in only a few firms in the construction sector. In our study,
it should be noted that large firms with more than 1,000 employees were the
dominant group (65.58 per cent) applying ABC. Even though many firms in
China supported ABC’s use, many factors hindered its implementation: 1)
difficulty in establishing activities and linkages to existing systems for
gathering information to enter into an ABC system; 2) lack of adequate IT
resources; 3) insufficient knowledge of ABC among employees, which leads to
the fourth reason; 4) lack of management support. Despite these obstacles,
our research review leads us to believe that the rate of ABC implementation
in an emerging market like China will continue to rise.
Jensen Comment
I'm not certain that
"accurate costing information" is
the main goal of ABC costing. Perhaps a better phrase is "comprehensive costing
information." For example, ABC costing declined in popularity in product costing
in the USA due to derivation costs and limitations of ABC costing for product
costing ---
http://en.wikipedia.org/wiki/Activity-based_costing#Tracing_Costs
The value of ABC costing may come more from the process of
investigating activity costs than from the dubious inaccurate product costs
using ABC models. One problem is that the benefits from a quality ABC costing
effort often do not exceed the costs of the effort. The above Terdpaopong et al.
paper suggests this may also be the case in China.
Academics love ABC costing because it is relatively easy to teach and is one
of the great 20th Century innovations (developed initially by practitioners) in
cost accounting. But academics may pass over the decline in popularity in
real-world implementations in practice.
"Better Accounting Transforms Health Care
Delivery. Accounting Horizons," by Robert S. Kaplan and Mary L. Witkowski,
Accounting Horizons, June 2014, Vol. 28, No. 2, pp. 365-383 ---
http://aaajournals.org/doi/full/10.2308/acch-50658 (Not Free)
• The GASB has proposed chang ing how state and
local governments calculate and report the costs and obligations
associated with defined benefit other postemployment benefit (OPEB)
plans .
• Government employers that fund their OPEB
plans through a trust that meets the specified criteria would have to
record a net OPEB liability in their accrual - basis financial
statements for defined benefit plans that would be based on the plan
fiduciary net position rath er than plan funding.
• The proposal would make a government’s
obligations more transparent, and m any governments would likely report
a much larger OPEB liability than they do today.
• The guidance would be effective for fiscal
years beginning after 15 December 2016 , and early application would be
encouraged.
• Comments are due by 29 August 2014 . Public
hearings are s et for September 2014.
Overview
The Governmental Accounting Standards Boa rd (GASB) has proposed
changing how state and local governments calculate and report the cost
of other postemployment benefits , which consist of retiree health
insurance and defined benefits other than pensions and termination
benefits that are provided to retirees .
By Michael Hicks, includes “This week marked the
full implementation of two new Government Accounting Standards Board
rules affecting the reporting of pension liabilities. These rules --
known in the bland vernacular of accountancy as Statements 67 and 68 --
require state and municipal governments to report their pensions in ways
more like that of private-sector pensions. …
One result of this is that governments with very
high levels of unfunded liabilities will see their bond ratings drop to
levels that will make borrowing impossible.
In some places, like Indianapolis or Columbus, Ohio, may have to
increase their pension contributions and perhaps make modest changes to
retirement plans, such as adding a year or two of work for younger
workers. Places like Chicago or Charleston, West Virginia, will be
effectively unable to borrow in traditional bond markets. Pension funds
in Chicago alone are underfunded by almost $15 billion. Under the new
GASB rules Chicago's liability could swell to almost $60 billion or
roughly $21,750 per resident. Retiree health care liabilities add
another $3.6 billion or $1,324 per resident, so that each Chicago
household will need to cough up $61,000 to fully fund their promises to
city employees. The promise will be broken. …”
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 15, 2014
SUMMARY: A government accounting maneuver to pay for road repairs,
subways and buses will allow many U.S. businesses to delay billions of
dollars in pension contributions for retirees. President Barack Obama signed
a $10.8 billion transportation bill that extends a "pension-smoothing"
provision for another 10 months. In short: companies can delay making
mandatory pension contributions, but because those payments are
tax-deductible some businesses will pay slightly higher tax bills, which
will help pay for the legislation. But the accounting tactic is
controversial. The government's moves could undermine its own efforts to
shore up the pension system. Some worry about the strain it could put on the
government agency tasked with protecting the retirement of 44 million
workers.
CLASSROOM APPLICATION: This is useful for coverage of accounting
for pensions. The article also shows how politics can impact tax planning
and business decisions.
QUESTIONS:
1. (Introductory) What extension is discussed in the article? What
is the reason for this extension?
2. (Advanced) What are the possible positive results of these
extension? What are the potential negative ripple effects of this extension?
Do the possible benefits outweigh the possible problems? Please explain the
reasoning behind your answer.
3. (Advanced) How are pensions entered into the accounting records?
How are pension liabilities calculated?
4. (Advanced) How are obligations to current and further retirees
affected by the extension? How is the accounting of those obligations
affected? How do the pension obligations differ from the accounting of those
pension obligations? (legal liability vs. cash flow vs. accounting rules)
5. (Advanced) What is the importance of properly accounting for
pension obligations? How are the financial statements impacted by accounting
for pensions? Why would this be of interest to users of the financial
statements?
Reviewed By: Linda Christiansen, Indiana University Southeast
A government accounting maneuver to pay for road
repairs, subways and buses will allow many U.S. businesses to delay billions
of dollars in pension contributions for retirees.
President Barack Obama on Friday signed a $10.8
billion transportation bill that extends a "pension-smoothing" provision for
another 10 months. In short: companies can delay making mandatory pension
contributions, but because those payments are tax-deductible some businesses
will pay slightly higher tax bills, which will help pay for the legislation.
Companies with 100 of the country's largest
pensions were expected to contribute $44 billion to their plans this year,
but that could be slashed by 30% next year, estimated John Ehrhardt, an
actuary at consulting firm Milliman.
International Paper Co. IP -0.25% , for example,
had planned to set aside $1 billion by 2016 to fund its $12.5 billion U.S.
defined benefit plan. The paper company says it now expects to funnel that
money into other projects, including share buybacks or investments in new
plants.
"It means more cash for us," says Chief Financial
Officer Carol Roberts.
But the accounting tactic is controversial. The
government's moves could undermine its own efforts to shore up the pension
system. Some worry about the strain it could put on the government agency
tasked with protecting the retirement of 44 million workers.
"To use the federal pension insurance program to
pay for wholly unrelated spending initiatives is just bad public policy,"
said Brad Belt, former executive director of the Pension Benefit Guaranty
Corporation, the government's pension insurer. "It has adverse implications
for the funding of corporate pension plans."
Companies have struggled to keep up with mounting
pension bills since 2008.
The present-day value of those promises increases
when interest rates decline. Currently, the largest pensions have a $252
billion funding deficit, which has increased by $66 billion since the
beginning of the year, according to Milliman.
The accounting maneuver was introduced in
Congress's last highway bill in 2012, and was backed by large business
groups, such as the Business Roundtable. The new bill, which expires in May,
will extend the method.
The bill essentially allows companies to base their
pension liability calculations on the average interest rate over the past 25
years, instead of the past two. The 25-year average is larger, because
interest rates were much higher before the financial crisis.
The accounting technique doesn't actually reduce
companies' obligations to retirees. Instead, it artificially lowers the
present-day value of future liabilities by boosting the interest rate
companies use to make that calculation.
The risk is that pension smoothing will ultimately
increase corporate pension deficits by encouraging executives to delay
payments, says the Congressional Budget Office. For instance, more companies
could default on their obligations to retirees.
PBGC executives and labor unions aren't worried
about the impact of the new transportation bill. "Even with this smoothing
provision, we'll be in a vastly better position," says Marc Hopkins, an
agency spokesman.
The financial health of the government's PBGC is
improving. The agency has mapped out different scenarios of economic growth
and estimated its fund to cover defaults will have an average deficit of
$7.6 billion in 2023, down from $27.4 billion late last year.
Pension smoothing measures will only add $2.3
billion to its estimated deficit, the agency says.
The AFL-CIO, the nation's biggest labor union
federation, says it supports pension smoothing because it reduces volatility
to balance sheets, which makes the prospect of offering pensions less
daunting.
"We've been supportive of greater smoothing in
pension funding generally," said Shaun O'Brien, assistant policy director
for health and retirement at the AFL-CIO. "While we would prefer a
longer-term permanent change in the rules, we're supportive of the approach
Congress has taken."
Under a 2006 law, companies need to make their
plans whole over time. Pension smoothing provisions both artificially and
temporarily make funding levels look healthier, so companies can lower their
contributions.
Exelis Inc., XLS +0.23% a defense contractor, now
expects to cut its pension contributions by as much as $350 million by 2017.
Chief Executive David Melcher told investors earlier this month that Exelis
would use the money to fund dividend payments, buybacks and to invest in the
company.
Some companies will continue to finance their
pension plans. Boeing Co. BA +0.37% says it won't change its strategy and
still expects to make a discretionary $750 million payment to its $68.6
billion in pension obligations.
"All you're really doing is deferring payments,"
said Jonathan Waite, chief actuary at SEI Investments Co., an asset manager.
"It has to be put in someday."
The long-term outlook for the federal budget
is worse than you would gather from Wednesday’s
update from the Congressional Budget Office
(PDF), and the CBO’s report is worrisome enough to start with. It
says that “if current laws generally remain
unchanged,” budget deficits will start growing again in a few years, and by
2024, debt held by the public will equal 77.2 percent of gross domestic
product.
The reality could be bleaker yet. The CBO is
required by Congress to assume in its baseline forecast that current laws
remain the same, even if that seems unlikely to happen. As a result, the
baseline forecast bakes in some unlikely projections. As the CBO notes, it
is assuming that three of the biggest items in the federal budget will
decline by 2024 to their smallest share of GDP since 1940*.
The three expenditure categories that are supposed
to wither away are discretionary spending on defense, discretionary spending
on everything other than defense, and mandatory spending on everything other
than interest payments, Social Security, and major health programs. Just to
be clear, that broad group includes the Pentagon, the federal courts, the
interstate highways, the prisons, immigration, agriculture, education, and
really just about everything the government does except transfer payments
and debt payments.
Here’s the chart that shows what the CBO is projecting. Again, this is not
what the CBO predicts will happen, but what it’s required to assume by order
of Congress.
The biggest cut that’s penciled in is to
discretionary spending. Here’s what the CBO has to say about that:
Discretionary Spending.
Discretionary spending encompasses a wide array of federal activities
funded or controlled through annual appropriations—including, for
example, most defense spending and outlays for highway programs,
elementary and secondary education, housing assistance, international
affairs, and administration of justice. Measured as a share of GDP,
discretionary outlays are projected to drop from 6.8 percent in 2014 to
5.2 percent in 2024; over the past 40 years, they have averaged 8.3
percent.
Could happen. But if you doubt that the federal
government will shrink to its pre-Pearl Harbor size, then you should be even
more concerned about the long-term outlook for balancing the federal budget.
SUMMARY: The Internal Revenue Service lowered a threshold for
renewable-energy projects to qualify for federal tax credits, potentially
providing a boon to developers and investors in the wind-power industry who
had been uncertain how heavily they could rely on them for financing. The
IRS and the Treasury Department said renewable-energy projects could qualify
for a pair of tax credits if they had incurred at least 3% of the total
project cost before the beginning of 2014, down from the previous threshold
of 5%. The guidance also clarified what sort of construction qualified as
work of a "significant nature," another test by which project developers -
and their investor partners - can be assured that they have qualified for
the credits, which provide the financial backbone of most major wind-farm
projects. This bulletin was the third attempt by the federal government to
clarify how projects could qualify for the tax-credit program, which expired
at the end of 2013 but is still open to developers, provided they began
installation in that year.
CLASSROOM APPLICATION: This is a good example of a tax credit
intended to encourage certain business activities. One of the most important
points in this article is that it shows how business decisions, strategy,
and planning are impacted by uncertainty about tax law.
QUESTIONS:
1. (Introductory) What are the details of the guidance issued by
the IRS and Treasury Department? What is the specific tax issue?
2. (Advanced) In the article, one person was quoted as saying, "the
whole industry is waiting on it." What did he mean by that? Why were
businesses waiting? Who made them wait? What are the ramifications of
business in the industry having to wait on this information? How could this
wait and the related implications have been prevented?
3. (Advanced) What will be the impact of the announced changes?
What ripple effects could occur? Do you think the IRS and Treasury
Department realize these ripple effects could occur?
4. (Advanced) Has the uncertainty about these rules been resolved?
Why or why not? Is tax uncertainty good or bad for business? Why do
businesses sometime face uncertainty regarding tax law? How can uncertainty
impact tax and business planning?
Reviewed By: Linda Christiansen, Indiana University Southeast
"IRS Relaxes Renewable Energy Project Tax Credit Rule," by Ted Mann, The
Wall Street Journal, August 8, 2014 ---
The Internal Revenue Service lowered a threshold
for renewable-energy projects to qualify for federal tax credits,
potentially providing a boon to developers and investors in the wind-power
industry who had been uncertain how heavily they could rely on them for
financing.
In guidance released Friday, the IRS and the
Treasury Department said renewable-energy projects could qualify for a pair
of tax credits if they had incurred at least 3% of the total project cost
before the beginning of 2014, down from the previous threshold of 5%.
Credits would be proportionally reduced in value below the 5% threshold, the
IRS said.
The guidance also clarified what sort of
construction qualified as work of a "significant nature," another test by
which project developers—and their investor partners—can be assured that
they have qualified for the credits, which provide the financial backbone of
most major wind-farm projects.
Friday's bulletin was the third attempt by the
federal government to clarify how projects could qualify for the tax-credit
program, which expired at the end of 2013 but is still open to developers,
provided they began installation in that year.
"The whole industry is waiting on it," said Bruce
Hamilton, a director in the energy practice at Navigant Consulting Inc. NCI
-0.42% "There are thousands of megawatts that are on hold as far as the
financing goes."
Developers and investors in the wind industry have
been awaiting the federal guidance since this spring, people in the industry
said, when a number of the large-scale investors that provide much of the
cash to fund major wind-power projects began demanding more explicit
assurance that projects would qualify.
One uncertainty: what it means to have begun work
of a "significant nature" on a wind project. The IRS on Friday cited
examples of construction that would help qualify wind-power developers for
credits, including having begun excavating foundations for wind towers,
installing the anchor bolts that hold towers in place, and pouring the
enormous concrete pads on which the towers sit.
Uncertainty over which projects would qualify for
tax credits—and a resulting reluctance of investors to sign financing
agreements—has been felt for months throughout the wind-power industry,
according to developers, investors and equipment manufacturers.
General Electric Co. GE +0.31% told investors on
its second-quarter earnings call last month that the company had delayed
booking between 400 and 500 expected orders for wind equipment, totaling
roughly $1 billion, as a result of uncertainty about the credit.
Periodic uncertainty about whether federal tax
credits would still apply to wind-power development has been a drag on the
industry, according to data from the American Wind Energy Association, a
trade group.
A record of more than 13,000 megawatts of new
wind-power capacity was installed in 2012, as the industry raced to finish
installations before the production tax credit expired at the end of that
year. While Congress eventually stepped in with a one-year extension of the
credit, installation of wind power fell 92%. Just a single wind turbine was
installed during the first six months of 2013, the association said.
The wind industry is trying to extend the
tax-credit program, arguing that the credits support billions of dollars in
construction work and are helping support innovation that will ultimately
bring the costs of wind power down.
The change in the 5% threshold is "relevant to more
than just wind farms," said Keith Martin, an attorney Chadbourne & Parke LLP
specializing in tax and project finance. Allowing the credits to apply to
projects that didn't reach the 5% threshold could allow other forms of
renewable energy to take advantage of the credits, including geothermal,
biomass, landfill gas and some kinds of hydroelectric and ocean energy
projects, he said.
Developers and equipment makers are focused on
extending the credits as a part of an omnibus tax "extenders" bill during a
lame-duck session of Congress later this year, after the midterm elections.
Egads! This is depressing.
College recruiters tell us colleges cannot get top students without promising
them A grades in their courses.
Purportedly Princeton university in 2004 started doing more than the other
Ivy League universities to limit the number of A grades somewhat, although
participation by faculty is voluntary. Cornell's efforts to embarrass faculty
about grade inflation by publishing grading distributions of all courses each
term was deemed a failure in curbing grade inflation. The program was dropped by
Cornell. Princeton's program for capping the number of A grades to 35% in most
classes may now be rescinded.
A
2004 policy adopted by Princeton sought to end grade inflation at the
university by recommending that departments place a 35% cap on A-range
grades for each academic course. However, The New York Times reports,
students have resisted the policy since it was
implemented a decade ago, saying that it
devalued their work and potentially gave their peers at rival schools a
competitive edge with post-graduate opportunities.
Now, Princeton may change its grading policy
following the release this week of a report commissioned by Princeton
President Christopher Eisgruber. The report recommends that Princeton remove
the "numerical targets" from their grading policy, as they are often
misunderstood as quotas or inflexible caps.
The report also found that this policy
inadvertently led potential applicants and their families to question
whether they should apply to Princeton, with students at other highly ranked
schools citing the policy to recruit applicants elsewhere:
The
perception that the number of A-range grades is limited sends the message
that students will not be properly rewarded for their work. During the
application process, students and parents consider the possible
ramifications in terms of reduced future placement and employment potential
... Janet Rapelye, Dean of Admission, reports that the grading policy is the
most discussed topic at Princeton Preview and explains that prospective
students and their parents see the numerical targets as inflexible. The
committee was surprised to learn that students at other schools (e.g.,
Harvard, Stanford, and Yale) use our grading policy to recruit against us.
When Princeton University set out six years ago to
corral galloping grade inflation by putting a lid on A’s, many in academia
lauded it for taking a stand on a national problem and predicted that others
would follow.
But the idea never took hold beyond Princeton’s
walls, and so its bold vision is now running into fierce resistance from the
school’s Type-A-plus student body.
With the job market not what it once was, even for
Ivy Leaguers, Princetonians are complaining that the campaign against
bulked-up G.P.A.’s may be coming at their expense.
“The nightmare scenario, if you will, is that you
apply with a 3.5 from Princeton and someone just as smart as you applies
with a 3.8 from Yale,” said Daniel E. Rauch, a senior from Millburn, N.J.
The percentage of Princeton grades in the A range
dipped below 40 percent last year, down from nearly 50 percent when the
policy was adopted in 2004. The class of 2009 had a mean grade-point average
of 3.39, compared with 3.46 for the class of 2003. In a survey last year by
the undergraduate student government, 32 percent of students cited the
grading policy as the top source of unhappiness (compared with 25 percent
for lack of sleep).
In September, the student government sent a letter
to the faculty questioning whether professors were being overzealous in
applying the policy. And last month, The Daily Princetonian denounced the
policy in an editorial, saying it had “too many harmful consequences that
outweigh the good intentions behind the system.”
The undergraduate student body president, Connor
Diemand-Yauman, a senior from Chesterland, Ohio, said: “I had complaints
from students who said that their professors handed back exams and told
them, ‘I wanted to give 10 of you A’s, but because of the policy, I could
only give five A’s.’ When students hear that, an alarm goes off.”
Nancy Weiss Malkiel, dean of the undergraduate
college at Princeton, said the policy was not meant to establish such grade
quotas, but to set a goal: Over time and across all academic departments, no
more than 35 percent of grades in undergraduate courses would be A-plus, A
or A-minus.
Early on, Dr. Malkiel sent 3,000 letters explaining
the change to admissions officers at graduate schools and employers across
the country, and every transcript goes out with a statement about the
policy. But recently, the university administration has been under pressure
to do more. So it created a question-and-answer booklet that it is now
sending to many of the same graduate schools and employers.
Princeton also studied the effects on admissions
rates to top medical schools and law schools, and found none. While the
number of graduates securing jobs in finance or consulting dropped to 169
last year from 249 in 2008 and 194 in 2004, the university attributed the
falloff to the recession. (Each graduating class has about 1,100 students.)
But the drop in job placements, whatever the cause,
has fueled the arguments of those opposed to the policy. The grading change
at Princeton was prompted by the creep of A’s, which accelerated in the
1990s, and the wildly divergent approaches to grading across disciplines.
Historically, students in the natural sciences were graded far more
rigorously, for example, than their classmates in the humanities, a gap that
has narrowed but that still exists.
Some students respect the tougher posture. “What
people don’t realize is that grades at different schools always have
different meanings, and people at Goldman Sachs or the Marshall Scholarship
have tons of experience assessing different G.P.A.’s,” said Jonathan
Sarnoff, a sophomore who sits on the editorial board of The Daily
Princetonian. “A Princeton G.P.A. is different from the G.P.A. at the
College of New Jersey down the road.”
Faye Deal, the associate dean for admissions and
financial aid at Stanford Law School, said she had read Princeton’s
literature on the policy and continued “to view Princeton candidates in the
same fashion — strong applicants with excellent preparation.”
Goldman Sachs, one of the most sought-after
employers, said it did not apply a rigid G.P.A. cutoff. “Princeton knows
that; everyone knows that,” said Gia Morón, a company spokeswoman,
explaining that recruiters consider six “core measurements,” including
achievement, leadership and commercial focus.
But Princetonians remain skeptical.
“There are tons of really great schools with really
smart kids applying for the same jobs,” said Jacob Loewenstein, a junior
from Lawrence, N.Y., who is majoring in German. “People intuitively take a
G.P.A. to be a representation of your academic ability and act accordingly.
The assumption that a recruiter who is screening applications is going to
treat a Princeton student differently based on a letter is naïve.”
Stuart Rojstaczer, a retired professor at Duke who
maintains a Web site dedicated to exposing grade inflation, said that
Princeton’s policy was “something that other institutions can easily
emulate, and should emulate, but will not.” For now, Princeton and its
students are still the exception. “If that means we’re out in a leadership
position and, in a sense, in a lonelier position, then we’re prepared to do
that,” Dr. Malkiel said. “We’re quite confident that what we have done is
right.”
Jensen Comment
Some of the pressure to limit the number of A grades comes from the very best
students admitted to an Ivy League university. They feel that it is no longer
possible to demonstrate that they are cream of the crop graduates when 80% of
the graduating class graduates cum laude, as in the case of Harvard
University.
The very best students in graduate professional programs like prestigious MBA
programs. voice the same complaints if most of the students in every course
receive top grades.
It's a national disgrace in the USA both in higher education and K-12
education.
I was hoping that there were enough genius students applying to Princeton
such that it could hang tough in its program to limit the proportion of A grades
in undergraduate courses. Apparently this is no longer the case!.
Back in 2004, Princeton University took a stand
against grade inflation with a policy recommending that academic
departments’ classes award grades in the A range no more than 35 percent of
the time. The policy was intended to standardize grading across departments
and give students a better sense of the distinction between "their
ordinarily good work and their very best work."
Now we’ve gotten a glimpse of how it all worked. A
faculty committee assembled to review the policy has issued a widely
discussed report describing the ways the anti-inflation plan has played
out—and recommending some big changes.
Among the committee’s findings: Around the time
that the faculty was discussing grade inflation, the distribution of grades
changed, as the graph below illustrates. Not surprisingly, the fraction of
A-range grades dropped, and the fraction of B-range grades grew. Most grades
at Princeton, though, continued to be A’s and B’s.
[Graph Not Quoted Here]
So, mission accomplished: The university stopped
awarding so many A’s. But now the Princeton committee advocates removing the
35-percent target. Why? In part because the committee found that the grading
policy also had a number of unintended consequences.
When an institution decides to take on grade
inflation, who exactly is affected? Let’s have a look at what the Princeton
professors found. The Losers
The admissions office: To the outside observer,
Princeton doesn’t seem to have much trouble in this department. We’re
talking about a place that admitted just 7 percent of its applicants and saw
close to 70 percent of those it admitted decide to enroll. Even so, the
grading policy is apparently a concern among prospective students and their
parents, putting the university at a competitive disadvantage.
What the report says: "Janet Rapelye, dean of
admission, reports that the grading policy is the most discussed topic at
Princeton Preview and explains that prospective students and their parents
see the numerical targets as inflexible."
The athletics department: Prospective students’
fears are of particular concern for the coaching staff.
What the report says: "Coaches find the perception
of the grading policy a significant obstacle to recruitment, making it more
difficult for them to attract the best student-athletes."
Engineering majors: While the policy was intended
to standardize grading across departments, there’s a wrinkle. Some
departments have more large introductory classes than others. If those
departments give out grades lower than A in introductory classes, they have
more of a cushion to award A’s to their own majors in upper-division
classes.
That phenomenon may be a double whammy for
engineering majors, the report explains. Those students are likely to find
themselves in large introductory physics and mathematics classes, exactly
the type of courses in which many non-A grades will be handed out. Their own
department, meanwhile, doesn’t offer the big intro classes that pull in lots
of nonmajors. That means fewer A’s to go around in their engineering
classes.
What the report says: "Our view is grades within
departments need to be meaningful in providing accurate feedback to students
but that this does not require identical grade distributions across
departments."
Students’ sanity: The committee found that the
grading policy adds to student anxiety, "in perception at least." Student
responses to a survey also suggest that the policy makes the classroom
environment more competitive and less collaborative.
What the report says: "One of the negative side
effects of the grading policy has been its contribution—in perception at
least—to the anxiety about grades and indeed about themselves that many
students experience while at Princeton."
Members of the Reserve Officers Training Corps: New
military officers commissioned through this program receive their first
assignments based in large part on their college grades. Those first
assignments set the stage for their military careers. For them, the
difference between A’s and B’s could be pivotal.
What the report says: "While it would be
unreasonable for Princeton to change its grading policy as a result of a
choice made by only a small number of students in each graduating class,
ROTC comprises a special group of students whose issues deserve to be taken
seriously."
Faculty members: While the Princeton committee’s
report did not delve into the issue, a recent journal article—this one
evaluating Wellesley College’s somewhat different policy to curb grade
inflation—said that students evaluated their professors in affected
departments less favorably after the change was made.
What the Wellesley study found: "It is the case at
Wellesley that students in courses with higher average grades also tend to
have higher evaluations of the quality of their professors’ instruction, but
this correlation cannot be taken as evidence that higher grades yield higher
evaluations." The Unaffected
Graduate- and professional-school applicants:
Aspiring Ph.D.’s and medical doctors may see the grading policy as a
detriment to their chances at graduate-school admission. However, the
committee found, "it is not evident that Princeton’s grading policy has any
effect."
What the report says: "While departments sometimes
make first cuts in their applicant pool based on such factors as GPA, we
have no reason to believe that Princeton students are failing to gain
admission to Ph.D. programs."
(Most) job applicants: Some employers ask job
applicants for their GPAs—and not full transcripts. Some even have strict
GPA cutoffs. For the rest, the Princeton name may carry the day.
What the report says: "While it is possible that a
few different Princetonians would get jobs at, say, Goldman Sachs if grades
were higher, the committee heard evidence that the actual number of
Princetonians in such jobs would be the same." Further, looking beyond the
very top of the class, "Princetonians appear not to have unusual difficulty
convincing potential employers to hire them for jobs at companies that are a
notch below the most elite." The Big Winner
Other colleges: If Princeton—along with its allies
in the war on grade inflation, Wellesley and Boston University—has been
harmed at all, it has been only by making other colleges, like those in
Cambridge and New Haven, more competitive.
What the report says: "The committee was surprised
to learn that students at other schools (e.g., Harvard, Stanford, and Yale)
use our grading policy to recruit against us."
August 10 reply from Bob Jensen
Hi David,
The argument for grade inflation in Ivy League
schools is that students that easily be straight-A
students in most USA universities should not be
penalized with lower grades due to grading caps in
Ivy League universities.
The argument against grade inflation in general is that
students are not motivated to work as hard or learn as
much if they are assured of A grades without extra
blood, sweat, and tears.
The most disturbing evidence of harm caused by grade
inflation took place recently at Harvard in an undergraduate
political science course where students were all assured of
an A grade if they did the minimal work required. Because
they were assured of an A grade, there was no incentive to
even do the minimal work. Over 120 students in the course
cheated because there was no incentive to even do the
minimal work.
To its credit Harvard expelled over half of the 120+ students. I
don't know why the other half were allowed to carry on at
Harvard.
In reality being assured of an A-grade probably has varying impacts
on student blood, sweat, and tears to learn. A pre-med student
facing a tough MCAT medical school admission test probably works
very hard in biology courses and could care less about most required
courses in the social sciences and humanities.
I would love to see Harvard students earning final grades in their
courses face competency-based tests taken by students at the University
of Wisconsin in a program where students are not required to take
classes --- only competency-based examinations.
That reminds me of an old Professor Snarf cartoon. Professor Snarf is
sweating profusely when he exclaims: "Is it true that faculty are going to
make faculty take the student admission tests?"
Respectfully,
Bob Jensen
Added Note
Worried students will borrow more money and pay private school tuition to avoid
the state-supported university competition for grades.
One of my relatives gave up free tuition (I volunteered to pay) at a flagship
university and went deeply into debt for assurances of top grades Bob Jensen's threads on Gaming for grades ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GamingForGrades
PwC "lacking the objectivity and integrity expected of consultants but not
actually breaking the law"
The giant consulting firm PricewaterhouseCoopers
occupies a position of trust on Wall Street, acting as a shadow regulator of
sorts that promises the government an impartial look inside the world’s
biggest banks.
But the firm — hired and paid by the banks it
examines — has now landed in the regulatory spotlight for obscuring some of
the same misconduct it was supposed to unearth, according to confidential
documents and interviews with people briefed on the matter.
New York State’s financial regulator is poised to
announce a settlement with PricewaterhouseCoopers, according to the
interviews, taking aim at the consulting firm for watering down a report
about one of the world’s biggest banks, Bank of Tokyo-Mitsubishi UFJ. The
regulator, Benjamin M. Lawsky, will impose a $25 million penalty against
PricewaterhouseCoopers and prevent one of its consulting units from taking
on certain assignments from New York-regulated banks for two years, a
reputational blow that could cause some banking clients to leave.
The firm, which is accused of
lacking the objectivity and integrity expected of
consultants but not actually breaking the law,
agreed to pay the fine and accept the two-year sidelining of its regulatory
consulting unit. PricewaterhouseCoopers appeared to have had little choice:
Mr. Lawsky’s office, which has the authority under a little-known New York
law to censure erring consultants even without a legal violation, threatened
to otherwise inflict a more sweeping and lengthy prohibition.
SUMMARY: A new rule requiring accounting firms to tell investors
exactly who is in charge of each company's audit is expected to be completed
next month. The rule from the Public Company Accounting Oversight Board is
aimed at giving investors more information and making auditors more
accountable. It would require accounting firms to disclose the name of their
lead "engagement partner" in charge of each audit the firms perform, every
year.
CLASSROOM APPLICATION: This article can be used for an auditing
class or in other classes when discussing auditing.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its purpose?
2. (Advanced) What new rule was proposed by the PCAOB? Why is the
requirement deemed to be valuable or necessary?
3. (Advanced) What reasons do supporters offer for the rule? What
are some concerns raised by other parties?
4. (Advanced) How do other countries handle this issue? Why might
there have been a difference in the past?
Reviewed By: Linda Christiansen, Indiana University Southeast
A new rule requiring accounting firms to tell
investors exactly who is in charge of each company's audit is expected to be
completed next month, according to the chairman of the government's audit
regulator.
The rule from the Public Company Accounting
Oversight Board is aimed at giving investors more information and making
auditors more accountable. It would require accounting firms to disclose the
name of their lead "engagement partner" in charge of each audit the firms
perform, every year.
PCAOB Chairman James Doty "anticipates that we will
move forward with the transparency project to disclose the name of the
engagement partner in September," Colleen Brennan, a PCAOB spokeswoman, said
Wednesday. The PCABO proposed the rule last December.
The rule's supporters, led by Mr. Doty, say
identifying the lead audit partner will encourage auditors to perform better
and help investors assess audit quality and performance, by making it
possible to get a sense of an individual partner's track record.
Some big accounting firms have opposed disclosing
the lead partners' names, citing potential liability and other concerns.
Previously, the PCAOB had said only that it
expected the rule to be completed before the end of 2014.
The PCAOB has said it is taking into account the
responses it received to its initial proposal over matters such as liability
and where the partner's name should be disclosed.
The Big Four accounting firms —
PricewaterhouseCoopers LLP, Deloitte & ToucheLLP, KPMG LLP and Ernst & Young
LLP—either didn't have any immediate comment or couldn't immediately be
reached.
Some other countries, such as the U.K., already
require disclosure of the lead audit partner's name in companies' audit
reports.
Hypothetical Illustration for Pacific Capital Bancorp Audit in 2012
Audits of broker-dealers improved slightly last
year compared with previous years, but a high percentage of the audits were
still deficient, had potential conflict-of-interest problems, or both, the
government's audit regulator said Monday.
Seventy-one of the 90 broker-dealer audits
inspected by the Public Company Accounting Oversight Board in 2013, or 79%,
had audit deficiencies or audit-independence problems, the PCAOB said.
Fifty-six of the 60 audit firms inspected had problems in one or more of
their broker-dealer audits, the board said.
The PCAOB has been inspecting audits of
broker-dealers for the past few years under an interim program after it was
granted new powers by the Dodd-Frank financial-overhaul law. The board said
it expects to make a proposal in 2016 for a permanent inspection program.
The 2013 results are better than those of the
previous two years, when virtually all of the broker-dealer audits the board
inspected had some sort of deficiency. The PCAOB's reports don't identify
the audit firms or the broker-dealers involved in the audits.
But the PCAOB said it was still concerned over the
extent and persistence of the deficiencies. High levels of deficiencies were
found across the board, the PCAOB said, regardless of whether the audit
firms also audited public companies, how many broker-dealer audits the firm
performed, or the size of the broker-dealer involved.
"Many of the observations noted during 2013 have
not changed from prior inspections and relate to fundamental auditing
principles," said Robert Maday, program leader of the PCAOB's inspection
program for broker-dealer audits. He urged firms that audit broker-dealers
to "re-examine their audit approaches."
The most frequent audit deficiencies found were in
areas including auditing revenue recognition, the auditor's response to the
risk of financial errors due to fraud, and audit procedures to rely on
reports from service organizations, the board said.
With regard to the permanent program, the PCAOB
said it is taking "a careful and informed approach" and will consider
whether it should exempt any category of firms from the inspection program.
It is widely held that better financial reporting
makes investors more confident in their predictions of future cash flows
and reduces their required risk premia. The logic is that more
information leads necessarily to more certainty, and hence lower
subjective estimates of firm "beta" or covariance with other firms. This
is misleading on both counts. Bayesian
logic shows that the best available information can often leave decision
makers less certain about future events.
And for those cases where information indeed brings great certainty,
conventional mean-variance asset pricing models imply that more certain
estimates of future cash payoffs can sometimes bring a higher cost of
capital. This occurs when new or better information leads to
sufficiently reduced expected firm payoffs. To properly understand the
effect of signal quality on the cost of capital, it is essential to
think of what that information says, rather than considering merely its
"precision", or how strongly it says what it says.
August 3, 2014 reply from David Johnstone
The idea is that we never know “true probabilities”, even if they “exist”,
we only have subjective beliefs. These beliefs are the basis on which
actions are chosen (i.e. by maximizing subjective expected utility, if we go
to this next step). Observed frequencies feed into our beliefs, and
sometimes they are the major influence. Similarly, subjective “symmetry”
arguments (we think we see symmetry in a coin) might be a major influence in
saying that “the probability of heads” is 0.5. But a coin does not have a
probability, at least not in the sense that it has weight, metal content,
and other physical attributes.
Big names Bayesian authors with this general philosophy are Kadane (ex
editor of J American Stat Assoc), Lindley, Savage, de Finnetti, Lad, O’Hagen,
Bernardo, and others. The only rule in this world is that your beliefs must
be “coherent” in the sense that they are mutually consistent in terms of the
laws of probability. New evidence must therefore be used via Bayes theorem
to get new probabilities.
Cheers,
David
"Are Fair Value Estimates a Source of Significant Tension in the
Auditor-Client Relationship? Evidence from Goodwill Accounting," by Douglas
Ray Ayres. Terry L. Neal, Lauren C. Reid, and Jonathan E Shipman, SSRN, August
2, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2474674
Abstract:
In recent decades, there has been a substantial
increase in the use of complex fair value estimates in financial
reporting. These uncertain and forward-looking estimates pose additional
challenges for auditors who are required to evaluate the reasonableness
of accounting estimations. We extend prior literature by investigating
whether or not uncertain estimates create significant tension between
audit firms and their clients. Specifically, we use the context of
goodwill estimations to examine the effect of accounting estimates on
the auditor-client relationship. We find a positive and significant
relation between a material goodwill write-off and a subsequent auditor
change. In addition, our results indicate that the likelihood of an
auditor switch increases as the impairment decision becomes less
favorable to the client. Furthermore, we find that as the relative
magnitude of a goodwill write-off increases, the greater the likelihood
the auditor-client relationship will discontinue. In addition to
providing important insights into the challenges faced by auditors in
their evaluation of goodwill impairments, this study informs discussions
regarding the audit of other complex estimates, which is particularly
relevant given the continued expansion of fair value estimation in
financial reporting.
SUMMARY: A proposed accounting change expected to force banks to
boost the amount of reserves they hold against soured loans could catch many
small and midsize lenders unprepared. The changes would require banks to
book loan losses much more quickly than they do now and force them to
dramatically increase their loan-loss reserves. Banks have some time to
adapt. The expected FASB changes likely won't take effect until 2017 or
2018. Global accounting rule-makers at the International Accounting
Standards Board already have enacted a similar change for banks outside the
U.S., beginning in 2018.
CLASSROOM APPLICATION: This article can be used for accounting in
the banking industry, and it is also useful to show how accounting rules can
and do change, as well as how rule changes can impact businesses. It is
particularly interesting that more than a third surveyed had little or no
familiarity with the coming changes, highlighting the importance for
accountants, and business professionals in general, to stay current with
accounting changes.
QUESTIONS:
1. (Introductory) What are the details surrounding the change in
accounting for bank reserves? What is the proposal?
2. (Introductory) What is FASB? Why is it involved in banking
rules?
3. (Advanced) The article says the changes might catch some lenders
unprepared. Why does the reporter make that statement? Why might some
lenders be unprepared?
4. (Advanced) How should bank management be preparing for these
changes? What will banks need to properly account for reserves under the new
rules?
5. (Advanced) How are the new rules expected to impact bank
financial statements? Will this impact the market values of the bank stock?
How might it affect business strategy?
6. (Advanced) How do the U.S. rules compare with rules for banks in
other countries? How do those differences affect comparability of financial
statements across the countries?
Reviewed By: Linda Christiansen, Indiana University Southeast
A proposed accounting change expected to
force banks to boost the amount of reserves they hold against soured loans
could catch many small and midsize lenders unprepared, according to a new
survey of bank executives.
More than half of the executives familiar
with the Financial Accounting Standards Board's expected changes said they
aren't planning to make significant modifications in their processes to cope
with the changes until after they're completed, according to the survey from
Sageworks, a financial-information company.
More than a third of the executives
surveyed have little or no familiarity with the changes that FASB, which
sets accounting rules for U.S. companies, hopes to finalize before the end
of the year, according to the survey.
The changes would require banks to book
loan losses much more quickly than they do now and force them to
dramatically increase their loan-loss reserves.
Banks have some time to adapt. The
expected FASB changes likely won't take effect until 2017 or 2018.
But banks should start preparing now
because they'll need to amass a lot of data on their loans' performance to
cope with the changes, and to make changes in their processes to store and
use that data, Sageworks said. If they don't, the company said, the banks
might not be able to assess and reserve for their loan losses as accurately.
With the changes, banks are "going to need
a lot more granular data for individual loans," perhaps three or four years'
worth of performance data, said Libby Bierman, a Sageworks analyst. "To get
that data, banks need to start today."
There are "good reasons" many banks aren't
yet prepared, said Donna Fisher, senior vice president of tax and accounting
for the American Bankers Association. Notably, FASB has yet to make some
decisions that could affect the final form of its new loan-accounting model,
and the board needs to make sure all banks are on the same page in
understanding what will be required of them, she said.
Also, "a lot of bankers are not focused on
it," said James Kendrick, vice president of accounting and capital policy
for the Independent Community Bankers of America. So much is happening now
in banking regulation that banks have to address that many aren't paying
much attention yet to the loan-accounting changes, he said.
Christine Klimek, a FASB spokeswoman, said
the board is "considering the feedback" it's received in response to its
loan-accounting proposal, and "will give banks and other lending
institutions sufficient time to incorporate the changes."
lFASB's changes, which the board has
proposed and is working toward competing, are expected to require banks to
record losses based on their future projections of loans going bad.
Currently, banks don't book loan losses until the losses have actually
occurred, an approach many observers think led banks to be too slow in
taking losses during the financial crisis. Under the new rule, banks will
have to record upfront all losses expected over the lifetime of a loan.
The new method is expected to speed up the
booking of losses and require banks to boost their loan-loss reserves
significantly, possibly by as much as 50%, according to FASB and some
industry estimates.
Global accounting rule-makers at the
International Accounting Standards Board already have enacted a similar
change for banks outside the U.S., beginning in 2018.
The IASB rule is softer, however,
requiring to book upfront only those losses based on the probability that a
loan will default in the next 12 months, not all lifetime losses.
The survey, conducted for Sageworks by
SourceMedia Research, polled 236 managers who deal with credit-risk
management at banks and credit unions with between $250 million and $5
billion in assets. Of those surveyed, 37% had little or no familiarity with
FASB's planned changes, though the proposal has been in the works and
much-publicized over the past few years.
Sixty-five percent of those surveyed use
spreadsheets to calculate their loan-loss reserves, as opposed to external
or proprietary software or other methods. But Sageworks says that may not be
sufficient to handle the massive amount of data banks will have to collect
to accurately predict future losses under the new model, and many banks
aren't yet acting to update their processes.
Of those surveyed, 34% plan to acquire new
software to comply with the new requirements when they're completed. Another
21% say they'll acquire new software before the new model is enforced. Most
of the other respondents either already have new software or don't know when
they will acquire it.
Jensen Comment
I'm just not as confident in the profession of "independent valuation experts."
You get ten such experts to give you a number, and you will get ten possibly
widely divergent numbers to a point that management and/or auditors can
selectively manage earnings by using carefully chosen valuation "experts." Most
such valuations rely upon crucial assumptions that are highly uncertain,
especially in the case of foreign debt like Argentine bonds.
Secondly, I'm not certain about the benefit-cost of such valuations of banks
having a lot of branches spread across the USA. This is the Ole-versus-Sven
debate that I've used with Tom too often already and will not repeat in this
message ---
http://www.trinity.edu/rjensen/Theory02.htm#LoanLosses
European banks and other banks outside the U.S.
will have to record losses on bad loans more quickly and set aside more
reserves for loan losses under an overhaul of finance-accounting rules that
global rule makers made final on Thursday.
Under the new standard, non-U.S. banks will have to
book loan losses based on their expectation that future losses will occur,
beginning in 2018. That is expected to speed up the booking of losses and
require greater loan-loss reserves.
Currently, banks don't record losses until they
have actually happened, but many observers believe that method led banks to
be too slow in taking losses during the financial crisis.
The move by the London-based International
Accounting Standards Board, which has been in the works for years, could
create a conundrum for the banking industry: Because U.S. and global rule
makers haven't been able to agree on the same accounting approach for
writing off bad loans, it could become more difficult to compare U.S. banks
and those outside the U.S.
U.S. and global rule makers have been striving for
years to eliminate differences between their rules in some major areas of
accounting, including loans and other financial instruments, but the effort
has been plagued by problems and delays. The two systems have gotten more
similar in some areas, but on this banking issue, some analysts say they are
growing more different.
The Financial Accounting Standards Board, the U.S.
accounting rule-setter, has proposed U.S. banks switch from the
incurred-loss model that both use now to the expected-loss approach, too.
But the two disagree on just how rapidly banks should book their loan
losses.
The IASB will require non-U.S. banks to immediately
book only those losses based on the probability that a loan will default in
the next 12 months. If the loan's quality gets significantly worse, other
losses would be recorded in the future. The IASB move will affect all
financial assets on non-U.S. companies' balance sheets, but the treatment of
bank loans is particularly important due to the role that soured loans and
credit losses play in their businesses.
The change "will enhance investor confidence in
banks' balance sheets and the financial system as a whole," said Hans
Hoogervorst, chairman of IASB, which sets accounting rules for most
countries outside the U.S.
The Institute of Chartered Accountants in England
and Wales, a London-based accountants' group, estimated that the IASB
changes will increase banks' loan-loss provisions by about 50% on average.
Iain Coke, head of ICAEW's financial-services faculty, said the new rule,
combined with tougher regulatory-capital requirements, may force banks to
hold more capital for the same risks. "This may make banks safer but may
also make them more costly to run," he said.
The FASB proposal, however, would require all
losses expected over the lifetime of a loan to be booked up front—so if it
is enacted, U.S. banks would record more losses immediately than banks in
other countries, and might have to set aside more reserves, hurting their
current financial results and making them look worse compared with foreign
banks, many banking and accounting observers believe. The FASB hasn't
completed its proposed changes, though it hopes to do so by year-end.
"It's unfortunate that we do have a different
standard being issued," said Tony Clifford, a partner with Big Four
accounting firm EY.
The IASB said in documents laying out its proposal
Thursday that although it and the FASB had made "every effort" to agree on
the same approach, "ultimately those efforts have been unsuccessful."
Christine Klimek, a FASB spokeswoman, said the FASB
believes its approach "best serves the interests of investors in U.S.
capital markets because it better reflects the credit risks of loans on an
institution's balance sheet." IASB's approach likely would lead to lower
loan-loss reserves than FASB's at U.S. banks, she said, "which would have
been counterintuitive to the lessons learned during the recent financial
crisis."
In addition, Mr. Clifford said, the new IASB rule
requires banks to use their own judgment to a greater extent than existing
rules when determining their expected losses, and that could lead to
differences between individual banks that could make it harder for investors
to compare them.
Among other provisions of the new rule the IASB
issued Thursday, non-U.S. banks will no longer have to record gains to net
income when their own creditworthiness declines, and losses when their
creditworthiness improves—a counterintuitive practice known in the U.S. as
"debt/debit valuation adjustments," or DVA. Those gains and losses will be
stripped out of the banks' net income and be placed into "other
comprehensive income," a separate measurement that doesn't affect the main
earnings number tracked by most investors. Banks can adopt that change
separately, before the rest of the IASB rule.
The FASB has proposed a similar move for U.S. banks
but has yet to enact it.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on August 22, 2014
SUMMARY: Accounting is complicated: but accounting rule-makers are
trying to make it at least a little simpler. The Financial Accounting
Standards Board, which sets accounting rules for U.S. companies, is
expanding its effort to simplify some areas of accounting, to make financial
reporting a little less complex and reduce costs for companies and their
accountants. FASB has added five more projects it plans to tackle as part of
that initiative, covering areas like how companies report their debt and
when they record taxes on certain transactions.
CLASSROOM APPLICATION: This article offers an opportunity to
discuss the cost/benefit relationships between the costs of complex
accounting vs. the value of the resulting additional detail to the users of
the financial statements. You can also use this article for a general
discussion of FASB and accounting standards.
QUESTIONS:
1. (Introductory) What is the Financial Accounting Standards Board?
What is its purpose?
2. (Advanced) The article states that accounting will be getting
less complex. How will a decrease in complexity impact financial reporting
and financial statements?
3. (Advanced) Why has accounting become complex? What value does
that complexity offer to users of the financial statements? What are the
benefits of decreasing complexity in accounting? What are potential problems
or costs of decreasing complexity?
4. (Advanced) What are the details of the various proposals? Please
explain each of them and provide explanations how journal entries will
change and how financial statements could be affected.
5. (Advanced) Can you think of other areas of accounting that could
be simplified without damaging the value of the financial statements? What
areas or features of accounting should not be simplified? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Accounting is complicated – but accounting
rule-makers are trying to make it at least a little simpler.
The Financial Accounting Standards Board, which
sets accounting rules for U.S. companies, is expanding its effort to
simplify some areas of accounting, to make financial reporting a little less
complex and reduce costs for companies and their accountants. FASB has added
five more projects it plans to tackle as part of that initiative, covering
areas like how companies report their debt and when they record taxes on
certain transactions.
The projects are low-hanging fruit – relatively
narrow, straightforward changes in accounting that clearly would help reduce
complexity and that the board expects to be able to make relatively quickly,
without the years of work that often accompany major revisions in accounting
rules.
“Complexity in accounting can be costly to both
investors and companies,” FASB Chairman Russ Golden said. The simplification
initiative, which FASB began in June, “is focused on identifying areas that
we can address quickly and effectively, without compromising the quality of
information provided to investors.”
The accounting industry is cautiously applauding
FASB’s effort. “The auditing profession welcomes initiative and efforts to
provide further clarity to financial statements,” said Cindy Fornelli,
executive director of the Center for Audit Quality, an industry group. But
the details and execution of FASB’s projects “will be critical,” she added.
One project the board has newly agreed to tackle
would simplify how companies classify debt on their balance sheets.
Currently, any debt coming due within the next 12 months is typically
categorized as “current” and any debt due beyond that period is
“non-current,” but accounting rules contain a lot of grey areas where that
classification isn’t so straightforward. The aim is to eliminate those grey
areas and make the 12-month standard more of a guiding principle that
applies in all cases.
In addition, FASB wants to simply the reporting of
a company’s costs to issue debt. Under current rules, companies report their
debt proceeds on one line of their financial statements and various
debt-issuance costs on different lines. The board wants to have only one
figure reported that would essentially be debt proceeds net of issuance
costs.
FASB also plans some tax-accounting changes. One
would have companies classify all of their deferred tax assets and
liabilities as non-current, instead of forcing them to determine whether
they’re current or non-current, as they must now. The other would ease the
process of recording taxes that result when one unit of a company sells
goods to another unit.
The five newly added projects follow the first two
simplification proposals which FASB formally issued in July to simplify the
measurement of inventory and eliminate the need for companies to break out
one-time “extraordinary” items on their earnings statements. FASB is also
researching about 70 other simplification ideas submitted by investors,
companies and accountants.
The framework is already in place. Teach For
America (TFA) is a highly successful nonprofit that enlists recent college
grads to teach in low-income communities throughout the U.S. In a similar
vein, Accounting For America would pair greenhorn accountants, presumably
recent college graduates, with small businesses in desperate need of
accounting services.
Similarly to the TFA mission, Accounting For
America would benefit both parties involved. The recent accounting grads
would gain hands-on experience and valuable work references, while the small
businesses would be able to get their bookkeeping in order at a presumably
lower rate than hiring a seasoned professional.
According
to a
2012 study by the
American Institute of CPAs, the number of students
enrolling in accounting programs and graduating with accounting degrees has
been steadily increasing over the past decade. For graduating accounting
degree students, the Accounting For America program could provide a viable
source of employment, while also aiding the small-business economy.
In addition to providing jobs for recent grads, the
proposed program could solve a major problem that I see in many small
businesses – out-of-date financials and sloppy bookkeeping. A small-business
owner who isn't current on financials is at a significant disadvantage. It's
impossible to run a successful business without knowing where your money is
coming from and where it is going.
Many entrepreneurs fall into this trap because they
get so caught up in day-to-day operations. They get enmeshed in the tiny
details and simply run out of hours in the day to review and update balance
sheets, accounts receivable and even payroll.
Continued in article
Jensen Comment
Sometimes accounting students in top universities are less help than than other
students who often have more training in accounting and taxation software. For
example, top universities seldom provide training in the application of
Quickbooks.
Jensen Comment
Most often the highest possible teaching evaluations go to teachers who make
subject matter crystal clear and easy to understand.
If you read my previous teaching evaluations you would find that I was a
master of the opposite pedagogy. Often intentionally and sometimes
unintentionally I confused my students, particularly my graduate students. I
don't particularly recommend this pedagogy for introductory courses such as
Principles of Accounting. But in graduate courses I think it's a mistake to make
everything crystal clear --- at least in class. I also think it's a mistake in
some case courses and other student participation courses such as when I taught
sections of a Trinity University course called First Year Seminar where the
subject matter was on troubles in the world (not an accounting course).
It's important to note that I was careful about trying not to confuse
students about technical rules such as FAS 133 rules about accounting for
derivative financial instruments. Those were more like teaching mathematical
derivations. For those I assigned Camtasia videos before class where I tried to
make the videos crystal clear.
But in class when we took up cases and applications I introduced
complications to confuse students and make them think. A perfect example of what
I would do in class is the following reply to a posting on the AECM by Tom
Selling. This illustrates how I would intentionally confuse students while
teaching Tom's posting. Tom always ipso facto assumes without proof that
replacement cost accounting leads to more relevant accounting for investors.
However, I repeatedly muddied the waters for my students when teaching
historical cost versus exit value versus entry value accounting.
Some of the replies on the AECM to my posting below indicates that I also
confused veteran financial accounting professors.
"Since the company will inevitably have to replace
the inventory after selling its present stock, the current cost of
replacement is the best measure of its economic value."
I might note that if you read Tom's blog regularly it's clear that the
balance sheet is his priority in terms of defining "economic value." He does not
seem to care if fair value or replacement cost adjustments to carrying value
adjustments to the balance sheet will never be realized in net earnings
calculations at a future date.
I am more concerned with the income statement than I am with the balance
sheet.
Consideration Must Be Given as To Why Companies Carry Inventory
The above assertion by Tom is not necessarily true when companies hold
inventories to avoid high marginal replacement costs of relatively small amounts
in markets where they never deal. Companies sometimes carry large and long-term
inventories to smooth out current spot price fluctuations of relatively small
quantities.
I carry a four-year supply of heating oil in a 4,000-gallon tank to smooth
out "current" replacement costs of buying the typical homeowner amount of say
100 gallons at a time. I do get a rather sizeable volume discount when I
infrequently replace this oil sometime between 1-4 years. The typical homeowner
up here either takes the current (spot) replacement cost of each 100 gallons
purchased on average for each delivery or pre-purchases at a futures price set
by the oil dealer at the start of the season. However, the oil dealer will not
allow more than pre-purchase of a one-year quantity to be delivered over the
year.
By carrying a huge 1-4 year inventory I have more flexibility as to timing
over a four-year horizon plus more negotiating power for a volume discount. That
is often the reason some companies carry what seems like an awful lot of
inventory. I would argue that the day to day spot prices for replacement of
fuel oil for me are not a good day-to-day measures of economic value. If I
measured "profits" based upon such replacement prices my "profits" would be
more fiction than fact based upon ups and down of daily fuel oil spot
prices.
And estimating my volume discount 1-4 years in advance is an unreliable vapor
estimate since neither buyer nor seller can predict spot prices up to four years
in advance.
Here is My Main Point
If Bob Jensen (with a 4,000-gallon tank) and his neighbor John Smith (with a
200-gallon tank) both valued fuel oil inventories at the identical
currentspot replacement costs they might
both be declared equally profitable in each given month of a single year by Tom
Selling ceteris paribus. But they are not likely to be equally profitable
in aggregate 13-48 months. This is because Tom builds so much fiction into the
calculation using monthly replacement costs into the fictional calculation of
Bob Jensen's "profits." Bob Jensen, unlike John Smith, does not replace fuel oil
in the tank every month or even every year.
I'm not saying Bob Jensen will always do better than John Smith due more
flexible market timing of purchases over a four-year time span, because there
are other considerations such as cost of capital tied up in larger inventory and
risks of carrying larger inventories such as leakage and contamination risks.
Tom's reasoning about economic value might be more appropriate if Bob Jensen
could sell some portion of his inventory of fuel oil. But there are regulations
that prevent him from selling my inventory, and he can only use so much
day-to-day on average over the course of four years. I would argue that economic
value to him is the historic average cost of fuel currently in the tank. This is
fact and not fiction! The inventory value in a business should be written down
only when the inventory is in some way damaged such as when oil is contaminated
with water leakage.
What Does This Have to Do With the Current Blog Posting by Tom Selling?
The title of Tom's August 10, 2014 posting is "The FASB Wants to Dumb Down
Inventory Impairment." I consider impairment to be something other than
temporary spot price declines. For example, if my fuel oil tank leaked to a
point where water mixed with my fuel oil I would have "impaired" inventory. This
is his Scenario B which I don't think the FASB is trying to change. I
would have to write down my damaged inventory, possibly to zero or worse.
But apparently the FASB wants to also consider "impairment" in terms of
short-term price fluctuations as in Tom's Scenario A. I have trouble
considering short-term replacement cost declines or NRV declines as
"impairments." The key is whether such spot price declines are are "permanent"
or temporary. I don't buy into inventory write downs unless they are indeed
permanent impairments.
As to whether they should be replacement costs or NRV in Scenario A,
I'm in favor of NRV. Replacement costs are fiction unless we specify when the
inventory will be replaced. It would be misleading to re-value Bob Jensen's
remaining fuel oil at current spot prices if he does not have to replace the
fuel oil for 47 months. And estimating fuel oil prices 47 months from now is
best left to astrologers. If Bob could sell his inventory then I might consider
NRV relevant for permanent reductions in spot prices. But I don't think
inventories should be written down at all for short-term spot price declines.
August 13. 2014 Reply to David Albrecht by Bob Jensen
Hi David,
I don't think anybody is arguing that inventory cannot become obsolete or
damaged. Tom's Scenario B covered this with his fashion-industry
illustration. The FASB is not trying to change accounting for Scenario B.
Also I don't think anybody, including me, thinks that a four-year
inventory is always a better or always a worse investment than a JIT-like
alternative where the fuel truck fills a small tank at least once per month.
My dispute with Tom is whether replacement cost accounting for a
four-year inventory should be exactly the same as the inventory accounting
for the JIT-like alternative. My dispute is that replacement cost accounting
is misleading for four-year inventories.
My accounting theory argument My argument is that accounting outcomes
should be different for the company with four-year inventories versus an
identical company with monthly inventory supplies. The reason is that these
companies have different economic replacement strategies leading to
different economic outcomes. Nobody can say the one strategy is ipso facto
better than the other strategy.
Current replacement cost accounting for four-year inventories at frequent
reporting dates (say monthly or quarterly or even annually) adds fictional
ups and downs in assets and earnings that will never be realized in fact.
Also nobody can predict what volume discounts will be obtained years out in
fuel oil pricing. By the way, the degree of competition among fuel dealers
where I live is such that I get sizable volume discounts when I do
eventually fill my big tank. The discounts themselves, however, are
unpredictable.
Advantages of the four-year inventories are volume price discounting and
the ability to time prices paid rather than having to always take the spot
price at each JIT-like delivery. Disadvantages include the cost of capital
tied up in long-term inventories and greater risk of obsolescence and
damage. I almost always buy oil in May when dealers want to reduce the
amount of money tied up in their idle summer inventories.
Rather than a owning a four-year tank it is theoretically possible to
hedge fuel inventory pricing in the derivatives markets. However, these
contracts have relatively short-term maturities rather than going out four
years. No heating oil dealer up here will enter into prepaid contracts for
more than one year.
A neighbor is fond of saying that Bob Jensen is prepared for Armageddon.
In the case of heating fuel there's an added safety that comes from a
four-year inventory of heating oil. I live in a climate where pipes can
freeze and burst in homes dependent upon heating fuel.
In 1974 during the Iran Oil Crisis some homes in New England could not
get their JIT deliveries of fuel oil at any price. Bob Jensen, then living
in Maine, had a sufficient inventory of heating fuel to ride out the 1974
crisis in an always-heated home.
In retirement here in the White Mountains I have both a four-year supply
of heating oil for our furnace and a four-year supply of propane under
ground for our four fireplace stoves. Some home owners up here with less
inventory of heating oil and propane have supplemental wood heaters, chain
saws, and timber that can be cut plus cords of wood beside their homes that
is already cut, dried, and split.
One of my neighbors down the road heats only with wood. Most all of his
summer days are spent cutting, splitting, and stacking mountains of wood. I
don't want to spend my summer days like that. And I think wood is a sooty
way to heat day in and day out. Wood smoke smells great but is probably not
healthy to breathe every day and night.
Respectfully,
Bob Jensen
Have I sufficiently confused everybody on entry value (replacement cost)
accounting?
Bob Jensen's threads on the advantages and limitations of historical cost
accounting versus exit value accounting versus entry value accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting
The above link includes quotations from my previous
"confusing" debates with Tom Selling.
Jensen Comment
Although I tend to agree with Tom that Golden is taking the wrong tack on
pension disclosures, I do take issue with the following quotation in Tom
Selling's post:
If FAS 87 (1985) had not been so thoroughly jury
rigged to appease the country’s largest employers (and as a by-product to
create jobs for accountants and their less gregarious actuary cousins), how
many more employees would now be receiving their full pension benefits?
I tend to not place such heavy responsibility on accounting standard setters.
I don't think that the FASB has such tremendous economic power over USA business
or government. Firstly, the pension funds are tremendously impacted by interest
rates and monetary policies that are were heavily affected by Federal Reserve
low interest rate and Treasury Department fiscal policies.
Pension funds, especially municipal and state worker funds, were swamped in
egregious frauds such as those in Detroit and Chicago and Stockton. I doubt that
any GASB pension accounting rules would have stood in the way of those massive
frauds.
Be that as it may, pension accounting can certainly be improved and reduced
disclosures contemplated by the FASB are not going to help matters. Tom's
correct about this.
The government’s official statistic for
college-tuition inflation has become somewhat infamous. It appears
frequently in the news media, and policy makers lament what it shows.
No wonder: College tuition and fees have risen an
astounding 107 percent since 1992, even after adjusting for economywide
inflation, according to the measure. No other major household budget item
has increased in price nearly as much.
But it turns out the government’s measure is deeply
misleading.
For years,
that measure was based on the list prices that
colleges published in their brochures, rather than the actual amount
students and their families paid. The government ignored financial-aid
grants. Effectively, the measure tracked the price of college for rich
families, many of whom were not eligible for scholarships, but exaggerated
the price – and price increases – for everyone from the upper middle class
to the poor.
Here’s an animation that explains the difference
succintly. It shows the government’s estimate of how college costs have
changed since 1992 — and, for comparison, toggles between the changes in the
colleges' published prices and actual prices, according to the College
Board, the group that conducts the SAT.
When it comes to social media North American CFOs say
their companies have focused mostly on the risks so far rather than the
opportunities, such as using it to get customer feedback or foster internal
collaboration. They say most of their attention has been focused on
establishing policies for employees' use of social media, providing
education on related risks and managing the company's presence in key social
media channels, according to Deloitte's second-quarter 2014 CFO Signals™
survey.
From PwC on August 5, 2014
In depth: Consolidation - A new standard is imminent ---
Click Here
Oops - A billion-dollar forecasting error in Walgreen’s Medicare-related
business: Key executives lost their jobs
From the CFO Journal's Morning Ledger on August 120, 2014
Good morning. Trying to profit amid the complex web of
regulations and pricing involved in Medicare is challenging enough. But a
recent management shake-up at
Walgreen Co.
shows that it isn’t just risky for the bottom line—it can be hazardous for a
finance chief’s career as well.
A billion-dollar forecasting error in Walgreen’s
Medicare-related business cost the jobs of Chief Financial Officer Wade
Miquelon as well as its pharmacy chief Kermit Crawford,
Michael Siconolfi on the WSJ’s front page. Mr.
Miquelon said he wasn’t forced to leave, but people familiar with the matter
say both he and Mr. Crawford were under pressure to step down.
Walgreen had failed to take into
account a spike in the price of some generic drugs that it sells as part of
annual contracts, among other things, when it offered a rosier forecast in
April. But once the price spike was included, an $8.5 billion forecast for
pharmacy unit earnings before interest and taxes was chopped by $1.1 billion.
From the CFO Journal's Morning Ledger on August 120, 2014
PCAOB
watchdog reviews auditing of estimates, mark-to-market accounting The U.S. government’s auditing watchdog will review audit
procedures for complex accounting estimates and mark-to-market accounting,
with the aim to improve current practices,
CFOJ’s Emily Chasan reports.
Auditors’ use of mark-to-market accounting and their
reliance on management’s accounting estimates have raised frequent red
flags.
Jensen Comment
The key to reviewing estimates is to conduct serious analysis of underlying
assumptions.
I once wrote a research monograph on this topic for the American Accounting
Association
Volume No. 19. Review of Forecasts: Scaling and Analysis of
Expert Judgments Regarding Cross-Impacts of Assumptions on Business
Forecasts and Accounting Measures
AAA Studies in Accounting Research
http://aaahq.org/market/display.cfm?catID=5
By Robert E. Jensen. Published 1983, 235 pages.
I think older AAA research and teaching monographs should be digitized and
made available free to the public.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 22, 2014
SUMMARY: The Public Company Accounting Oversight Board issued a
staff paper seeking input on whether it should update its rules on auditing
companies' use of estimates, as well as measurements of "fair value," in
various parts of their financial statements. Estimates are widely used when
companies determine matters like how much to set aside in reserves for bad
loans, or how much assets should be written down. Fair value is the closest
approximation of market value for a given asset or liability. But making the
estimates can be difficult, and auditors often have problems in assessing
them.
CLASSROOM APPLICATION: This article can be used in financial
accounting and auditing discussions of estimates and fair value.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its function? What is
it proposing in this article?
2. (Advanced) What is the PCAOB considering changing? What are the
reasons for these proposed changes?
3. (Advanced) The article notes that the PCAOB issued a "staff
paper." What is that? Why did the organization issue a staff paper instead
of changing the rule?
4. (Advanced) What challenges do auditors face when reviewing
estimates and fair-value measurements? How does it impact clients?
5. (Advanced) How important are estimates and fair-value
measurements in financial reporting? How significant are those components of
financial statements? Should there be cause for concern regarding how these
are calculated? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Regulators took a first step Tuesday toward
revamping how auditors review the use of key accounting estimates that can
have a big effect on companies' financial statements.
The Public Company Accounting Oversight Board
issued a staff paper Tuesday seeking input on whether it should update its
rules on auditing companies' use of estimates, as well as measurements of
"fair value," in various parts of their financial statements.
Estimates are widely used when companies determine
matters like how much to set aside in reserves for bad loans, or how much
assets should be written down. Fair value is the closest approximation of
market value for a given asset or liability. But making the estimates can be
difficult, and auditors often have problems in assessing them, said the
PCAOB, the government's audit-industry regulator.
The board, in introducing the paper, said it plans
to use input from investors, auditors and others in formulating potential
new rules on the auditing of estimates and fair value that would be more
comprehensive and consistent than current rules. It would likely be years
before any new rules on the matter were to take effect.
Reviewing estimates and fair-value measurements has
"proven challenging to auditors," the paper says—they require a company to
exercise judgment, and so they may be more susceptible to misstatement and
require more focus from auditors. The PCAOB has frequently found
deficiencies in those areas when it inspects audits.
"Accounting estimates and fair-value measurements
can be subjective and complex, yet they can be an important part of a
company's financial statements and critical to investors' decision-making,"
PCAOB Chairman James R. Doty said in a statement.
The risk measures adopted in this paper are Value at
Risk and Expected Shortfall. Estimates of these measures are obtained by fitting
the Generalized Pareto Distribution
"Risk Analysis for Three Precious Metals: An Application of Extreme Value
Theory," Qinlu Chen and David E. Giles, Department of Economics,
University of Victoria Victoria, B.C., Canada V8W 2Y2 August, 2014 ---
http://web.uvic.ca/~dgiles/blog/EWP1402.pdf
Gold, and other precious metals, are among the
oldest and most widely held commodities used as a hedge against the risk of
disruptions in financial markets. The prices of such metals fluctuate
substantially, introducing a risk of its own. This paper’s goal is to
analyze the risk of investment in gold, silver, and platinum by applying
Extreme Value Theory to historical daily data for changes in their prices.
The risk measures adopted in this paper are Value at Risk and Expected
Shortfall. Estimates of these measures are obtained by fitting the
Generalized Pareto Distribution, using the Peaks ‐ Over ‐ Threshold method,
to the extreme daily price changes. The robustness of the results to changes
in the sample period is discussed. Our results show that silver is the most
risky metal among the three considered. For negative daily returns, platinum
is riskier than gold; while the converse is true for positive returns.
The difference between physics versus finance models is that physicists
know the limitations of their models.
Another difference is that components (e.g., atoms) of a physics model
are not trying to game the system.
The more complicated the model in finance the more the analyst is trying
to substitute theory for experience.
There's a lot wrong with Value at Risk (VaR)
models that regulators ignored.
The assumption of market efficiency among regulators (such as Alan
Greenspan) was a huge mistake that led to excessively low interest rates and
bad behavior by banks and credit rating agencies.
Auditors succumbed to self-serving biases of favoring their clients over
public investors.
Banks were making huge gambles on other peoples' money.
Investors themselves ignored risk such as poisoned CDO risks when they
should've known better. I love his analogy of black swans on a turkey farm.
Why don't we see surprises coming (five
excellent reasons given here)?
The only group of people who view the world realistically are the
clinically depressed.
Model builders should stop substituting
elegance for reality.
All financial theorists should be forced to
interact with practitioners.
Practitioners need to abandon the myth of optimality before the fact.
Jensen Note
This also applies to abandoning the myth that we can set optimal accounting
standards.
In the long term fundamentals matter.
Don't get too bogged down in details at the expense of the big picture.
Max Plank said science advances one funeral at a time.
The speaker then entertains questions from the audience (some are very
good).
James Montier is a very good speaker from England!
Mr. Montier is a member of GMO’s asset allocation
team. Prior to joining GMO in 2009, he was co-head of Global Strategy at
Société Générale. Mr. Montier is the author of several books including
Behavioural Investing: A Practitioner’s Guide to Applying Behavioural
Finance; Value Investing: Tools and Techniques for Intelligent Investment;
and The Little Book of Behavioural Investing. Mr. Montier is a visiting
fellow at the University of Durham and a fellow of the Royal Society of
Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc.
in Economics from Warwick University
http://www.gmo.com/america/about/people/_departments/assetallocation.htm
There's a lot of useful information in this talk for accountics scientists.
The IASB and FASB's joint revenue transition resource
group met recently to explore a number of topics related to the
implementation of the new revenue accounting standard. Issues discussed
include the principal-agent assessment; shipping and handling costs related
to the definition of transaction price; royalty constraints in light of
contracts that contain multiple performance obligations; and potential
economic benefits of renewal periods when assessing the impairment of
capitalized contract costs.
More Fiction in Misleading Pension Deficit Underreporting
From the CFO Journal's Morning Ledger on August 8, 2014
A transportation bill signed by President Obama
on Friday will likely boost tax receipts that can then be used
to pay for road repairs, subways and buses. But that money has to come from
somewhere, and for the next 10 months at least, that somewhere is corporate
pension funds that were about to be subject to mandatory contributions,
CFOJ’s Vipal Monga reports.
With those contributions made optional for the time
being, some companies say that money previously earmarked for pension funds
will now go to dividends, buybacks or company investments.
The transportation bill achieved this by
extending a “pension-smoothing” provision, which allows companies to
calculate their liabilities based on the average interest rate over the past
25 years, instead of the past two. The 25-year average is larger, because
rates were higher before the financial crisis.
Many companies are understandably pleased to have a
freer hand in what they do with their cash for now. But that bill will come
due eventually, and the risk is that pension smoothing will ultimately
increase corporate pension deficits by encouraging firms to delay making
contributions.
From the CFO Journal's Morning Ledger on August 8, 2014
Boston Globe: Is Shareholder Value Bad For Business? The decision this week by drugstore chain Walgreens to go against
the will of shareholders and remain domiciled in the U.S. following its
merger with a European outfit, is just one of many acts in the ongoing
morality tale about what it means to run a corporation in latter-day
America. Does one do ‘the right thing’ by opting for what’s best for
‘shareholder value’ or for wider ‘society’? That question is threatening to
rip apart Massachusetts-based, family-owned grocery store chain Market
Basket, whose unfolding story is being told in the
Boston Globe.
Operating across three New England states, Market Basket board members
dismissed the popular company CEO Arthur T. Demoulas and two executives on
June 23. Loyal staff and sympathetic
customers didn’t like that: so now the staff are on strike and customers
have boycotted the stores, threatening the business’ very existence. “This
controversy is the tip of an iceberg,” said James Post, coauthor of the 2002
book “Redefining the Corporation” and a professor emeritus at Boston
University School of Management. “And what’s below the iceberg is a much
larger debate about the relationship between shareholders and all of the
other parties that help account for the success of a company.”
It sounds like great management philosophy—but
critics say we need to get back to a broader vision of the purpose of
corporations
The uprising against the owners of Market Basket
that’s been unfolding over the past several weeks looks at first like a
classic showdown between the powers that be and the little guys who would.
In one corner stands a coalition of board members and major shareholders who
think it should be returning higher profits; in the other, a crowd of
employees fiercely devoted to the recently fired CEO, who won their loyalty
by paying high wages, providing generous benefits, and handing out regular
bonuses. Amazingly, even customers have joined the revolt, turning Market
Basket stores into ghost towns and costing the company millions of dollars
in losses.
There’s something heartwarming about workers
risking their necks in the name of a beloved former boss. But to observers
who know how modern corporations work, the protests can seem a little naive:
After all, everybody knows that a corporation is an entity whose first job
is to maximize profits and deliver the highest return possible to its
owners. As some commentators have noted, Market Basket is a business, and
demanding that its investors forgo profits in service of some greater good
goes against everything we know about the natural laws of capitalism.
Unless, of course, it doesn’t. Related
Timeline of Market Basket events
Experts on the history of business say the Market
Basket saga is a window onto something deeper than a power struggle among
the Demoulas clan that owns it. They see it as emblematic of a war over the
future of the American corporation—what its purpose is, how it should be
run, and whom it should be engineered to benefit. They argue that maximizing
profit and shareholder value—an approach to running companies that drives
investment on Wall Street and serves as the closest thing to modern
management gospel—is only one way of defining corporate success, and a
fairly new one at that.
“This controversy is the tip of an iceberg,” said
James Post, coauthor of the 2002 book “Redefining the Corporation” and a
professor emeritus at Boston University School of Management. “And what’s
below the iceberg is a much larger debate about the relationship between
shareholders and all of the other parties that help account for the success
of a company.”
A company like IBM or General Motors could be the
heart of an entire ecosystem of suppliers, investors, and even civic
institutions.
Quote Icon
Post and others argue that a well-run company
can—and should—be managed in a way that benefits not just the investors who
own its stock, but a wide range of constituents. As opposed to
“shareholders,” they call these people “stakeholders”: a group that includes
employees, customers, suppliers, and creditors, as well as the broader
community in which the company operates, and even the country that it calls
home. According to that view, Market Basket’s employees and customers are
essential to the firm’s success and, thus, rightful beneficiaries of its
prosperity.
Importantly, it’s not just antimarket leftists who
are making this point: It’s pro-business thinkers who want to see a more
competitive future for American corporations. Critics like Post argue that
the singleminded emphasis on profits and shareholder value—which took hold
in the corporate world during the 1980s—has actually hurt corporations in a
number of ways, giving their leaders the wrong kinds of incentives, gutting
their future in pursuit of short-term profits, and often draining them of
their real value and putting them at odds with their communities.
To take seriously the idea of a
“stakeholder”-oriented corporation is to realize that firms like Market
Basket, which we rely on in our daily lives and which rely on us in return,
don’t have a fixed role in a capitalist society, but rather exist as tools
that can serve a variety of functions. While “shareholder value” is
attractive in its simplicity, a look at its track record suggests it might
be an idea that has reached its sell-by date.
***
Today, it’s widely taken for granted that the
American corporation functions as a standalone, self-interested entity
responsible exclusively to its investors. But it wasn’t always this way.
“The early corporations were chartered by the state to meet a social
purpose,” Post said. “Sometimes it was to build highways, sometimes it was
to run banks, but there was always public purpose that went with the grant
of a charter.” The message was straightforward: People who owned
incorporated companies ran them at the pleasure of the state, and, in
exchange for various legal protections, had a responsibility to do more than
enrich themselves.
Though such demanding legislative charters had long
fallen out of use by the mid-20th century, when American corporations
entered what is widely considered their golden age, historians say that many
executives nevertheless held onto the notion that they were overseeing
entities with a role in society, and were responsible for creating more than
the value that existed on paper. “They viewed their job as a sort of
stewardship of an economic and social institution,” said Lynn Stout, a
professor at Cornell University Law School and the author of “The Myth of
Shareholder Value.”
During this era of so-called managerial capitalism,
which began roughly in the 1920s, corporations were seen by both their
managers and much of the American public as institutions that mattered in
themselves: They produced useful products, gave workers and their families a
stable and often long-term source of income, and played a role in the cities
and towns where they did business. A company like IBM or General Motors
could be the heart of an entire ecosystem of suppliers, investors, and even
civic institutions.
But a change was coming to American capitalism.
Facing unprecedented competition from Europe and Asia, these long-stable
firms began to look like sleepy behemoths. And economists had begun to worry
that top executives had become so powerful they were running companies with
their own personal interests at heart, lining their pockets at the expense
of the stockholders who, in theory, should have been benefiting in
proportion to the company’s success.
The solution to all these problems, famously
articulated by the University of Chicago free market economist Milton
Friedman in a 1970 New York Times article, was an elegant one: By framing
the corporation purely in terms of its monetary value to shareholders, and
setting aside the notion that it might be a valuable entity in and of itself
by virtue of what it did, corporate America suddenly had an easy way to
measure performance. The scheme had a kind of moral clarity: The risk of
operating a company is borne by stockholders, so they’re the ones who
deserve to reap the rewards.
A well-managed company, then, would have a high
stock price that reflected the best possible use of its assets. A poorly
managed one was a target for a new class of investor—the corporate
raider—who saw big companies as collections of assets that could be bought,
broken up, and sold at a profit.
CEOs got the message: The point of running a
company was to keep the share price high. And to keep their eyes on the
target, boards started tying executive pay to the share price, by paying
CEOs with stock options that were much more valuable than their paper
salary. In the wake of the “shareholder value” revolution, everything except
the value of a company’s stock—including its impact on the lives of its
employees, its contracts with suppliers and retailers, whether it was liked
or hated by its customers—came to be seen as almost irrelevant. Everything
you needed to know about how a company was doing was believed to be
reflected in its share price.
By the 1990s, the notion that a CEO had an
obligation to maximize shareholder value had become an unquestioned mantra
taught in business schools; ordinary people assumed it was simply the way of
the world. “People think it was brought down from Mount Sinai by Moses, as
the 11th Commandment,” said Richard Sylla, a professor who specializes in
the history of financial institutions at NYU Stern School of Business, and
the coauthor of a recent article in the journal Daedalus critiquing the
notion of shareholder supremacy. “If you’re younger than 50 or 60, you’ve
lived in a world where everyone taught you that this is what a corporation
is supposed to do—maximize profit and shareholder value. But the world used
to be different.”
The philosophy of shareholder supremacy, initially
a reform to curb irresponsibility in managers, has ended up causing
significant problems of its own, say Sylla and other critics. CEOs became
obsessed with stock price at the expense of all other considerations. Some,
like the executives at Enron, went so far as to defraud their own
stockholders by engineering bogus profits. Countless others made
short-sighted decisions intended to goose earnings, keep investors happy,
and enrich themselves—all without regard for the long-term health of their
companies.
The broader social effects of the shift toward
shareholder value are clear, critics say, with wages stagnating and
unemployment remaining stubbornly high even as the stock market has
rebounded after the recession. Meanwhile, if the point was to benefit
shareholders, it’s not clear that worked either. Roger Martin, the former
dean of the Rotman School of Management at the University of Toronto, points
out in his 2011 book, “Fixing the Game,” that from 1933 to 1976, returns on
investment in the S&P 500—the decades immediately before the “shareholder
value” took hold—were actually higher than they have been since. And Stout
notes that in the 20 years after 1993, when a change to the tax code
encouraged corporations to tie executive compensation to share price,
investors in the S&P 500 saw returns that were slightly worse than what they
were getting during the 40 years prior. The life expectancy of S&P 500
companies, meanwhile, has been cut dramatically—from around 70 years in the
1920s to 15 years today.
“We have been dosing our public corporations with
the medicine of shareholder value thinking for at least two decades now,”
Stout has written. “The patient seems, if anything, to be getting worse.”
As the effects of shareholder supremacy have begun
to make themselves evident—Stout points to Sears and Motorola as examples of
companies that have been hollowed out in the name of stoking share prices—an
alternative approach to running a corporation, known as the stakeholder
model, began gaining purchase among academics and business leaders. This
model, as described by its proponents, recommends taking a less simplistic
and short-term view of what makes a company successful, and calls for
measuring its value not just in terms of profits and stock price, but the
total impact it has on the lives of people who come into contact with it.
There are clear reasons this might be better for employees, customers, and
their communities. In the long run, say thinkers like Stout and Post, it is
going to be better for the competitiveness of the American company. Pointing
to firms like Market Basket, they argue that stakeholder-focused companies
are ultimately more stable and financially healthy—a win, ultimately, for
the very shareholders being forced to make room at the trough for other
interested parties.
***
Though lots of prominent companies now take pains
to cultivate reputations as conscientious corporate citizens, would-be
reformers want something more. “All that stuff is just window dressing,”
said Stout, referring to philanthropic programs financed by big corporations
in the name of good PR. “Corporate social responsibility means running a
business that contributes to public welfare—that’s the moral defense of
capitalism. Business should be a force for good, not for the enrichment of a
few small individuals.”
Jensen Comment
It would seem that anything that is bad for business adversely affects
shareholder value. However, is the opposite the case. Is everything good for
increasing shareholder value good for business. Most of the debate hinges on
long-term versus short-term values.
Milton Friedman argued that the only responsibility of business should be
making profits while abiding by all laws ---
http://www.bostonglobe.com/ideas/2014/08/02/shareholder-value-bad-for-business/3O4MYxjWgmJ2DOPwkeYxyN/story.html
This is of course difficult when laws are conflicting or unclear --- as is often
the case. One example is affirmative action where the laws are sometimes vague
or conflicting. Adverse publicity can sometimes cut on both sides of the sword.
A classic problem is when tax laws and regulations allow companies to avoid
taxes in a way that hurts them with adverse publicity such as when Walgreens
contemplated moving its headquarters across the Atlantic Ocean --- a decision
that the company has since rescinded due to both bad publicity and governmental
pressures. The company would have benefitted in the short run by this inversion,
but it's not at all clear that the long-term benefits would have been positive.
It's clear that the private sector differs greatly from the public sector in
terms of social responsibilities. For example, the government is ideally
subjected to the democratic voting process with respect to controversial
decisions such as banning genetic modification certain food products. A company
deciding to modify or not modify its products via genetic modification is not
directly subjected to the will of the people except via government intervention.
Highly controversial decisions that are on surface socially responsible have
many possible favorable and adverse externalities. For example, if an enormous
electric power company elects to substitute coal and nuclear power generation
with solar, wind, and hydo power (as is the case with the power generating
companies in Vermont) there are many possible
externalities for which government would be accountable but not the power
companies themselves. For example, enormous increases in the cost
of power may cause a spike in unemployment and huge losses of tax revenues from
businesses depending on cheap power. In fact power-intensive companies may move
to another state where power is cheaper.
At the moment, there's huge political fight in New Hampshire over what is
termed the northern pass ---
http://en.wikipedia.org/wiki/Northern_Pass_transmission_line
Power companies want to destroy a significant portion of our forests for
enormous (80-foot) transmission towers to bring in hydro power from Quebec. What
is profitable for the power companies has adverse externalities on life in the
forests as well as life in Quebec if more and more land is flooded for newer and
larger hydro dams. But those are Canadians who are hurt. Why should our USA
companies care about Canadians if the Northern Pass transmission lines add
shareholder value to USA power companies.?
"When Did the U.S. Forfeit its Moral Leadership in the World?" by
Steven Mintz, Ethics Sage, August 6, 2014 ---
Click Here
46 Senators Objecting to Plans to Change Tax Accounting to Accrual-Based
Rules
From the CFO Journal's Morning Ledger on August 8, 2014
Many Senators Object to Raising Cash from Small Businesses.
A group of senators object to plans by
Congress
to force small businesses to change accounting methods
in order raise revenue to support tax reform, the
WSJ’s CFO Journal reports. Some 46 senators sent a letter
Wednesday to Senate Finance Committee
Chairman Ron Wyden (D., Ore.) and Ranking Member Orrin Hatch (R., Utah),
opposing proposals that would force some small businesses to use accrual
accounting, rather than cash accounting. The shift would essentially force
firms to pay income taxes on money not yet received. The changes could raise
more than $23 billion in tax revenue over the next decade, but the senators
said the “negative impact” couldn’t justify the change. “The basic tenet of
taxation is ‘ability to pay,’” they wrote. The changes, which have been in
draft proposals by the House and the Senate in the past year, would affect
businesses with more than $10 million in revenue that don’t currently have
inventory, such as dentists, architects, engineers and attorneys and CPAs.
The senate version could also affect farmers.
From the CFO Journal's Morning Ledger on July 31, 2014
Regulatory requirements are making trading in
repurchase agreements, or repos, more expensive, and that has
banks backing away from
this critical part of the plumbing that keeps money flowing through the
financial system.
Repos function as short-term loans, which are backed
by collateral, such as a government bond. Borrowers agree to sell the bonds
to another party for cash, with the promise to repurchase the bond at a
slightly higher price some time in the future.
Regulators are pleased with the changes. Before the
crisis, many Wall Street firms relied heavily on repos, but then lost access
to those funds when investors panicked about the value of mortgage bonds and
the solvency of firms that relied on repos for cash. But there are signs
that the reluctance of banks to facilitate huge amounts of repo transactions
is contributing to increased volatility.
As organizations migrate to cloud computing, they
could be putting their data at significant risk. Positioning the internal
audit (IA) function at the forefront of cloud implementation and engaging IA
to create a cloud risk framework tool can provide organizations a view on
the pervasive, evolving and interconnected nature of risks associated with
cloud computing. Such a tool can also improve efficiency in compliance and
risk management efforts and be used to develop risk event scenarios.
Jensen Comment
I think there is possibly a lot of missing data across the USA. I found the
property tax information for our former house in San Antonio but not our current
house in New Hampshire. However, towns in New Hampshire provide free and
detailed property tax information for each street address at the towns'
Websites. I think it is probably best to first try to get property tax data from
each taxing jurisdiction in the USA.
In general it's misleading to compare property taxes across different
jurisdictions and even within jurisdictions. For example, property may have
different homeowner exemptions in different jurisdictions. Property taxes may
seem high in a state having no income and/or sales taxes. Consideration should
also be given to what home owners are getting for their property taxes. For
example, very high property taxes in New York City get you lousy public schools.
Lower property taxes in South Dakota get you arguably the best public schools in
the USA.
Unfairness or fairness in property taxation generally begins with the
fairness or unfairness of the value appraisals of a jurisdiction. For example,
Bexar County in San Antonio frequently changes appraised value. In towns and
villages in New Hampshire properties may not be revalued for years and may be
totally out of line with recent sales transactions in a given jurisdiction.
Comparisons on the basis of square footage or acreage may be totally misleading.
For example, in New Hampshire a five acre parcel with an outstanding view may be
assessed at ten times the value of a 20 acre parcel buried in the woods because
New Hampshire has a view tax that is factored into the property tax valuation.
Condos on the 40th floor will be valued much higher per square foot than condos
on the third floor in most any city in the USA.
FULL convergence with the United States - leading to the creation of one
single set of global accounting standards - is no longer an achievable
project, said Hans Hoogervorst, chairman of the International Accounting
Standards Board (IASB), at the Singapore Accountancy Convention (SAC) on
Thursday.
His grim pronouncement leaves no doubt as to the fate of collaborative
efforts that began over a decade ago; it also comes shortly after the IASB -
the global accounting standards setter - published its completed
international financial reporting standard (IFRS) on financial instruments,
IFRS 9, without the US Financial Accounting Standards Board's (FASB)
participation.
"The FASB decided to stick to current American practices and leave the
converged position," Mr Hoogervorst said.
"It's a pity. Convergence would have allowed the US to make the ultimate
jum
p to IFRS. But nobody can force it to do so; if it wants to stick with US GAAP (Generally Accepted Accounting Principles - the US financial reporting
standard), that's its choice. But IFRS moves on - we have a large part of
the world to take care of."
July 31 (Reuters) - An employee complaint exposed
accounting misconduct at L-3 Communications Holdings Inc, according to
people familiar with the matter, prompting the aerospace and defense
supplier to fire four people, revise two years of earnings statements and
cut its earnings forecast.
L-3's shares plunged as much as 17 percent - their
biggest intraday percentage drop ever - after the company said on Thursday
it would take a pretax charge of $84 million for misconduct and accounting
errors, including cost overruns and overstated sales figures from 2013 and
2014.
The surprise announcement prompted some analysts to
cut ratings on the company, and raised concern about a broader problem at
L-3, which also suffered an ethics scandal in 2010.
The sources said the latest misconduct stemmed from
a single fixed-price contract for maintenance and logistics support with the
U.S. military that began in December 2010 and runs through January 2015.
The Pentagon has not barred L-3 from bidding on
other contacts as a result of the misconduct, the sources added.
The pretax charge includes adjustments for
accounting errors L-3 found as it scrubbed its books during the review, said
the sources, who spoke on condition that they not be named.
"The profit L-3 expected in the contract just
wasn't there," said one of the sources.
The sources declined to say which branch of the
military had the contract, or precisely which part of L-3 was involved,
other than that it was in its aerospace unit. They also would not say how
recently the employee lodged the complaint.
However, they said the New York-based company
quickly fired four employees and hired law firm Simpson Thatcher to conduct
the investigation and consulting firm AlixPartners to perform forensic
accounting.
"We had some bad actors and they are no longer part
of L-3," Chief Executive Michael Strianese said on a conference call with
analysts.
Another employee resigned in connection with the
review. The whistleblower is still with the company, and the review is
continuing, but not expected to turn up significant additional charges, the
sources said.
L-3, founded in 1997 and built through mergers and
acquisitions of smaller companies, supplies a wide range of military and
civil electronics equipment and services, including aircraft "black boxes,"
communications transponders and cockpit display panels.
The accounting errors surprised investors, but they
stopped short of triggering a "restatement" of L-3's accounting. Instead,
the financial statements are being "revised" to reflect what are considered
non-material adjustments, and the statements can still be relied on by
investors, the sources said.
L-3 also reported on Thursday preliminary sales of
$3.02 billion for the second quarter ended June 27, but said the figure
could be revised lower after the review is finished.
The company cut its full-year earnings forecast by
30 cents a share, to $7.90-$8.10 per share from $8.20-$8.40, reflecting
expected charges in the second half related to the review.
Analysts peppered Strianese and CFO Ralph
D'Ambrosio with questions on the conference call about whether other
misconduct could appear elsewhere.
"We have no reason to believe that this issue
occurred at any other segment of the company," Strianese said.
Accounting irregularities tend to unnerve investors
and bring further scrutiny of company's operations, analyst said. The
incident raised memories of a 2010 event in which an L-3 unit was suspended
from doing contract work for the U.S. Air Force for allegedly using a
government computer to gather business information for its own use.
Strianese said that case found no evidence that
anyone at L-3 "did anything wrong" and "actually proved that we did not have
any bad actors."
Still, "situations involving accounting misconduct
with government contractors do not end quickly and generally are expanded in
scope," said CRT Capital analyst Brian Ruttenbur, who cut his rating on L-3
stock to "sell" from "fair value."
D'Ambrosio said the contract involved in the review
had average annual sales of about $150 million.
"It's a low-margin contract and with these
adjustments, it is now in a loss position," he said.
L-3 said about $50 million of the $84 million
charge related to periods prior to 2014 and about $30 million related to the
second quarter of 2014.
Defense contractor L-3 Communications said Thursday
that it fired four employees after discovering they overstated the company's
profit and sales from a contract with the U.S. government.
The New York company said a fifth employee
resigned. It said the employees, who worked for its aerospace systems
business, also inappropriately deferred some cost overruns associated with
the contract. L-3 described the contract as a maintenance and logistics
support contract with the U.S. Department of Defense, and said the deal
began Dec. 1, 2010, and ends January 31. The deal brings in about $115
million in annual revenue for the company.
"The misconduct included concealment from L-3's
Corporate staff and external auditors," L-Communications 3 Chairman and CEO
Michael Strianese said during a conference call.
The company did not disclose the names or positions
of the employees or provide other details about the contract. Government
spokespeople were not able to confirm the specifics of the contract.
L-3 Communications said it is conducting an
internal review and will take an $84 million charge associated with the
misconduct. It said $34 million of that total will come from the first half
of 2014. Separately, it will reduce its net sales by $43 million. The
company also cut its estimate for second-half operating income for the
aerospace systems business by $35 million.
Shares of L-3 Communications Holdings Inc. tumbled
$14.68, or 12 percent, to $104.96 Thursday as the markets slumped.
According to the Company, the adjustments primarily
relate to “contract cost overruns that were inappropriately deferred and
overstatements of net sales, in each case with respect to a fixed-price
maintenance and logistics support contract,” and are the result of
“misconduct and accounting errors” at the Aerospace Systems segment, which
“included concealment from L-3's Corporate staff and external auditors.”
If you purchased shares of L-3, if you have
information or would like to learn more about these claims, or if you have
any questions concerning this announcement or your rights or interests with
respect to these matters, please contact Casey Sadler, Esquire, of Glancy
Binkow & Goldberg LLP, 1925 Century Park East, Suite 2100, Los Angeles,
California 90067, by toll-free telephone at (888) 773-9224 or by telephone
at (310) 201-9150, by e-mail to shareholders@glancylaw.com, or visit our
website at http://www.glancylaw.com. If you inquire by email, please include
your mailing address, telephone number and number of shares purchased.
This press release may be considered Attorney
Advertising in some jurisdictions under the applicable law and ethical
rules.
Jensen Comment
The title of the above article is a little misleading. Some of the NFL veterans
in the article took risks financial risks that paid off. The article does not
mention those that were more conservative with investments and probably are
better investment managers or hired better investment managers.
The article does not mention Hall of Famer John Elway who bought five car
dealerships and two restaurants that were almost sure-thing money makers. Elway,
however, did get burned in a Ponzi scheme, but I don't think his losses here
made a big dent in his fortunes. He has taken some other investment risks such
as his investments in arena football, but I think he could easily absorb the
losses. However, I do not know this for a fact. His 2004 divorce probably
cost him more than any of his business losses. He sure took some rough physical
beatings when he was still a quarterback for the Denver Broncos.
The Worst Sack Ever on John Elway (former All-Pro Quarterback in the
Mile-High City)
Elway Got Schemered!
Stanford Graduates Should Know Better
"John Elway Invested $15 MILLION With Alleged Ponzi Schemer,"
Huffington Post, October 14, 2010 ---
http://www.huffingtonpost.com/2010/10/14/john-elway-invested-15-mi_n_762663.html
Former Denver Broncos quarterback John Elway and
his business partner gave $15 million to a hedge-fund manager now accused of
running a Ponzi scheme.
The Denver Post reported Thursday that Elway and
Mitchell Pierce filed a motion saying they wired the money to Sean Michael
Mueller in March. They said Mueller agreed to hold the money in trust until
they agreed on where it would be invested.
A state investigator says 65 people invested $71
million with Mueller's company over 10 years and it only had $9.5 million in
assets in April and $45 million in liabilities.
Elway's filing asks that the court put their claims
ahead of others so they can collect their money first. His lawyer declined
to comment.
Jensen Comment
It's hard to feel sorry for rich people who play in games without rules (hedge
funds)
Better to play in games with rules and stand behind 325 lb linemen with missing
teeth, BO, and noses that look like corkscrews.
It's also hard to know how much celebrities really lose in some business
ventures. On occasion they are merely investing their names and promotion
efforts without sacrificing much in the way of personal investments.
Often professional athletes and other celebrities are so busy with their
non-financial activities and are so naive about finance and accounting and taxes
that they are especially vulnerable to con artists
who bleed them dry in one way or another. Examples are too
numerous to mention and include NBA star Ray Williams who become a homeless bum
and Debbie Reynolds of Hollywood fame who had to go back to working for food in
Las Vegas.
Every night at
bedtime, former Celtic Ray Williams locks the doors of his home: a
broken-down 1992 Buick, rusting on a back street where he ran out of
everything.
The 10-year NBA
veteran formerly known as “Sugar Ray’’ leans back in the driver’s seat,
drapes his legs over the center console, and rests his head on a pillow of
tattered towels. He tunes his boom box to gospel music, closes his eyes, and
wonders.
Williams, a
generation removed from staying in first-class hotels with Larry Bird and
Co. in their drive to the 1985 NBA Finals, mostly wonders how much more he
can bear. He is not new to poverty, illness, homelessness. Or quiet
desperation.
In recent weeks, he
has lived on bread and water.
“They say God won’t
give you more than you can handle,’’ Williams said in his roadside sedan.
“But this is wearing me out.’’
A former top-10 NBA
draft pick who once scored 52 points in a game, Williams is a face of
big-time basketball’s underclass. As the NBA employs players whose average
annual salaries top $5 million, Williams is among scores of retired players
for whom the good life vanished not long after the final whistle.
Dozens of NBA
retirees, including Williams and his brother, Gus, a two-time All-Star, have
sought bankruptcy protection.
“Ray is like many
players who invested so much of their lives in basketball,’’ said Mike
Glenn, who played 10 years in the NBA, including three with Williams and the
New York Knicks. “When the dividends stopped coming, the problems started
escalating. It’s a cold reality.’’
Williams, 55 and
diabetic, wants the titans of today’s NBA to help take care of him and other
retirees who have plenty of time to watch games but no televisions to do so.
He needs food, shelter, cash for car repairs, and a job, and he believes the
multibillion-dollar league and its players should treat him as if he were a
teammate in distress.
One thing Williams
especially wants them to know: Unlike many troubled ex-players, he has never
fallen prey to drugs, alcohol, or gambling.
“When I played the
game, they always talked about loyalty to the team,’’ Williams said. “Well,
where’s the loyalty and compassion for ex-players who are hurting? We opened
the door for these guys whose salaries are through the roof.’’
Unfortunately for
Williams, the NBA-related organizations best suited to help him have closed
their checkbooks to him. The NBA Legends Foundation, which awarded him
grants totaling more than $10,000 in 1996 and 2004, denied his recent
request for help. So did the NBA Retired Players Association, which in the
past year gave him two grants totaling $2,000.
Feedback on the question in my previous post could
take many directions. Around the same time that Elliott wrote about the 3rd
wave many authors were advocating various approaches to help U.S. companies
become competitive. Deming and Goldratt published books about the problem in
1986 and followed that with other books adding more specificity. CAM-I
published its conceptual design (edited by Berliner and Brimson) in 1988 and
numerous authors (e.g., McNair) have written about activity-based cost
management since that time. In 1990 Senge wrote about systems thinking (The
Fifth Discipline) and Hammer introduced the concept of Reengineering
adding more depth and specificity in Reengineering the Corporation
with Champy in 1993. In 1996 Womack and Jones published Lean Thinking
with recommendations similar to Imai's approach in his 1986 Kaizen.
More recently Johnson and Broms wrote about the living systems model (in
Profit Beyond Measure) and Baggaley and Maskell have described
value-stream management. I have developed a considerable amount of
information about the first three approaches, some information about
approaches 5, 6, and 7, but very little about the 4th approach
Reengineering. To consider the Reengineering approach see my summary of
Hammers' 1990 paper (Hammer, M. 1990. Reengineering work: Don't automate,
obliterate. Harvard Business Review (July-August): 104-112. ) at
http://maaw.info/ArticleSummaries/ArtSumHammer1990.htm
My current view is that reengineering should be the
first step after one embraces systems thinking and then it can be followed
by other approaches. This is because approaches such as continuous
improvement (TOC, PDCA, etc.), and value-stream management should not be
used on obsolete process designs that companies should not be using in the
first place.
1. The systems thinking (Deming 1986, 1993, Senge 1990) approach.
2. The theory of constraints (Goldratt 1986, 1990) approach.
3. The activity-based cost management (CAM-I 1988, McNair 1990, etc.)
approach.
4. The reengineering (Hammer and Champy 1990, 1993) approach.
5. The self-organizing lean enterprise, including just-in-time (Womack and
Jones 1996, Imai 1986) approach.
6. The living systems model (Johnson and Broms 2000) approach.
7. The value-stream management (Baggaley and Maskell 2003) approach.
In a new research paper, Christian Terwiesch,
professor of operations and information management at Wharton, and Karl
Ulrich, vice dean of innovation at the school, examine the impact that
massive open online courses (MOOCs) will have on business schools and MBA
programs. In their study — titled, “Will Video Kill the Classroom Star? The
Threat and Opportunity of MOOCs for Full-time MBA Programs” — they identify
three possible scenarios that business schools face not just as a result of
MOOCs, but also because of the technology embedded in them. In an interview
with Knowledge@Wharton, Terwiesch and Ulrich discuss their findings.
An edited transcript of the interview appears
below.
Knowledge@Wharton: Christian, perhaps you could
start us off by describing the main findings or takeaways from your
research?
Terwiesch: Let me preface what we’re going to
discuss about business schools by saying that Karl and I have been in the
business school world for many, many years. We love this institution, and we
really want to make sure that we find a sustainable path forward for
business schools.
The history of SACO 2006-8, as told through court
documents dating back more than six years, provides a view into how the
mortgage-backed security industry was built up and spectacularly collapsed.
For JPMorgan, it has become the mortgage-backed security from hell.
Last week, JPMorgan Chase’s costly legal troubles
took another step toward completion when trustees for 311 mortgage-backed
securities sold by the bank or inherited through acquisitions prior to the
financial crisis agreed to a $4.5 billion settlement. Another 14 got an
extension to still consider the deal, while five trusts wholly rejected the
settlement, leaving open the option for them to continue litigation against
the bank. SACO 2006-8, created and marketed by Bear Stearns two years prior
to its government-supported acquisition by JPMorgan in 2008, was one of the
trusts that rejected the deal.
The detailed history of this one trust’s creation
and sale, as told through court documents dating back to a lawsuit filed by
the bond insurer Ambac six years ago, provides a view into how the
mortgage-backed security industry was built up and spectacularly collapsed.
And it may be one of the very few chances that the investors who bought
these securities — and the insurance companies that guaranteed them — can
find out what actually happened.
More importantly, it may be the only chance left
for the public to get a granular view of what actually happened in the
run-up to the financial crisis.
The best way to understand the importance of SACO
2006-8 to both the inner workings of the mortgage-backed securities industry
and JPMorgan is to start in the present and travel back to the past.
A large chunk of JPMorgan’s more than $20 billion
legal tab last year over the bank and its affiliates’ practices in marketing
and selling mortgage-backed securities before the financial crisis is owed
to two settlements: one with the Department of Justice for $13 billion and
the previously mentioned $4.5 billion deal. (The latter deal still requires
approval by a judge, and if granted will finally remove the bulk of
financial crisis-era legal liabilities from the bank.) The combined $17.5
billion cost of those two settlements, reached less than a week apart,
nearly matched JPMorgan’s net income of $17.9 billion last year.
The settlement included a statement of facts that
JPMorgan agreed to — not a guilty plea — describing generally how its
employees (and those of Bear Stearns and Washington Mutual) marketed
mortgage-backed securities to investors even though some of the loans didn’t
comply with the loan underwriters’ own guidelines for selling and
securitizing them. The civil penalty of $2 billion only applied to what
JPMorgan did before the crisis, not Bear Stearns or Washington Mutual, and
released the bank from civil liability for claims arising from the
securities included in the settlement.
“Without a doubt, the conduct uncovered in this
investigation helped sow the seeds of the mortgage meltdown,” Attorney
General Eric Holder said when announcing the deal between the Justice
Department, several states, and other regulatory agencies and JPMorgan,
which ranks as the country’s largest bank by assets.
JPMorgan’s chairman and Chief Executive Officer
Jamie Dimon described 2013 in a letter to investors as “the best of times
[and] the worst of times,” and said that the bank came through “scarred but
strengthened — steadfast in our commitment to do the best we can.”
Many of the same mortgage-backed securities covered
by the Justice Department deal were also among those included in the $4.5
billion trustee settlement, SACO 2006-8 being one of them.
“We believe the acceptance by the Trustees of the
overwhelming majority of the 330 trusts is a significant step toward
finalizing the settlement,” a JPMorgan spokesman said in a statement earlier
this month. The spokesman declined further comment for this story.
SACO 2006-8 was one of many mortgage-backed
securities pumped out by Bear Stearns during the housing and credit boom.
Made up of almost 5,300 home equity lines of credit from California,
Virginia, Florida, and Illinois acquired by a Bear subsidiary called EMC,
the trust had a principal balance of $356 million. Its most senior notes,
the “Class A Notes” that would get paid off first by the stream of home
equity payments, got the highest possible ratings from Moody’s and Standard
& Poor’s, and were buoyed by an insurance policy from the AAA-rated
Wisconsin-based bond insurer Ambac that guaranteed payments on the senior
debt.
Almost a third of the home equity lines came from
American Home Mortgage Corporation, which would declare bankruptcy less than
a year later — not coincidentally, the same year home equity origination
would peak. By March 2008, Bear Stearns would be acquired by JPMorgan after
its stock plummeted as clients and investors got nervous about its
mortgage-backed securities holdings. Two years and a few months later, in
November 2010, Ambac would file for bankruptcy.
But SACO 2006-8 continued to live. It would be
quickly downgraded and, by the end of 2010, it had already experienced some
$141 million worth of losses and had 41% of its loans go delinquent or
charged off entirely.
A lawsuit filed in 2008 by Ambac, unsealed in 2011,
included an email from a Bears Stearns manager to a trader describing the
loans that would make up SACO 2006-8 as a “SACK OF SHIT” and, alternately, a
“shit breather.”
“I hope you’re making a lot of money off of this
trade,” the manager also wrote to a trader. When asked to explain himself in
a deposition, the manager said that “shit breather” was a “term of
endearment.”
SACO 2006-8 was hardly the only Bear Stearns
mortgage deal that Ambac and others have said was put together by hiding the
low quality of the underlying mortgages from investors and insurers. Ambac’s
complaint alleges that Bear “knew and actively concealed that it was
building a house of cards.”
Ambac further said in its complaint that less than
25% of the loans Bear Stearns had acquired from American Home Mortgage were
current and 60% had been delinquent for a month. Of those loans, 1,600 ended
up in SACO 2006-8. The four transactions covered in the first Ambac suit (it
has also filed a second suit against JPMorgan) had $1.2 billion in losses by
2011 and lead to Ambac paying out $641 million on their insurance coverage
to bondholders.
JPMorgan, which inherited the suit from Bear,
responded in court documents that Ambac was a financially sophisticated
company that actively sought Bear’s business and had access to the
underlying loan data used in constructing the securities.
Selling mortgages based on home equity lines of
credit were a relatively new but quickly growing portion of Bear’s mortgage
securities business. Ambac’s complaint says that Bear’s EMC subsidiary in
2005 had 9,300 home equity lines worth $509 million, but by the end of 2006
those figures had grown to some 18,000 loans worth $1.2 billion. Moreover,
the home equity business was just one portion of Bear’s mortgage machine.
From 2003 to 2007, EMC would purchase and then package for investors over
345,000 loans worth some $69 billion.
As Ambac’s lawsuit was winding its way through the
courts, SACO 2006-8 emerged again, this time in a lawsuit brought by New
York Attorney General Eric Schneiderman.
As co-chairman of the Residential Mortgage-Backed
Securities Working Group, a group of law enforcement officials convened by
the Obama administration to investigate mortgage fraud before the financial
crisis, Schneiderman said Bear Stearns sold mortgage-backed securities
featuring “material misrepresentations and flagrant omissions.”
Bear’s representations as to the quality of the
loans “were false, misleading, and designed to conceal fundamental flaws and
defects in the defendants’ due diligence systems,” Schneiderman said.
The complaint said “thousands of investors” were
harmed by “systemic fraud” and that losses on more than 100 mortgage-backed
securities it identified from 2006 and 2007 were $22.5 billion on an
original balance of $87 billion. One of those securities was SACO 2006-8.
For its part, JPMorgan said that Schneiderman’s
suit was based on “recycled claims already made by private plaintiffs.” To
be sure, one of the lawyers in Schneiderman’s office, Karla Sanchez, was one
of Ambac’s lawyers during her time at Patterson Belknap Webb & Tyler. But a
source told the Wall Street Journal at the time that Sanchez did not work on
the case.
JPMorgan settled the Schneiderman case as part of
its $13 billion deal with the Justice Department, with the state of New York
receiving $613 million of that amount.
“We’ve won a major victory today in the fight to
hold those who caused the financial crisis accountable,” Schneiderman said
at the time of the settlement.
A 1,625-square-foot bungalow at 51 Perthshire Lane
in Palm Coast, Fla., is among the thousands of homes at the heart of J.P.
Morgan Chase JPM +0.55% & Co.'s $5.1 billion settlement with a federal
housing regulator on Friday.
In 2006, J.P. Morgan bought one of two mortgage
loans on the home made by subprime lender New Century Financial Corp. J.P.
Morgan then bundled the loan with 4,208 others from New Century into a
mortgage-backed security it sold to investors including housing-finance
giant Freddie Mac. FMCC +11.89%
By the end of 2007, the borrower had stopped paying
back the loan, setting off yearslong delinquency and foreclosure proceedings
that halted income to the investors, according to BlackBox Logic LLC, a
mortgage-data company. Current Account
Settlement Puts U.S. in Tight Spot
The Palm Coast loan wasn't the only troubled one in
the New Century deal: Within a year, 15% of the borrowers were
delinquent—more than 60 days late on a payment, in some stage of foreclosure
or in bankruptcy—according to BlackBox. By 2010, that number exceeded 50%.
"That's much worse than anyone's expectations when
the deal was put together," said Cory Lambert, an analyst at BlackBox and
former mortgage-bond trader. "It's all pretty bad."
J.P. Morgan sidestepped many of the
subprime-mortgage problems that bedeviled rivals during the financial
crisis, and avoided much of the postcrisis scrutiny that dragged down others
on Wall Street. But now its own behavior during the housing boom is coming
under close examination as investigators work through a backlog of cases.
The bank dealt with some of the biggest subprime
lenders of the time, including Countrywide Financial Corp., Fremont
Investment & Loan and WMC Mortgage Corp., a former unit of General Electric,
according to the Federal Housing Finance Agency complaint.
J.P. Morgan's relationship with New Century, a
subprime lender that went bankrupt in 2007 and later faced a Securities and
Exchange Commission investigation and shareholder suits, shows that the New
York bank was part of the frenzied push to package mortgages for investors
at the end of the housing boom.
The New Century deal, J.P. Morgan Mortgage
Acquisition Trust 2006-NC1, was one of 103 cited in the lawsuit against J.P.
Morgan brought by the FHFA, which oversees Freddie Mac and home-loan giant
Fannie Mae. FNMA +13.40%
The $5.1 billion settlement is part of a larger
tentative deal with the Justice Department and other agencies that would
have J.P. Morgan pay a total of $13 billion. That deal is expected to be
completed this week.
"While these settlements seem huge, given the
nature of the offenses, they are trivially small," said William Frey, chief
executive of Greenwich Financial Services LLC, a broker-dealer that has
participated in investor lawsuits against banks that packaged mortgages.
J.P. Morgan declined to comment on the settlement or any loans in the bonds
it bought.
The FHFA has gotten aggressive in recouping losses
from mortgages and securities sold to Fannie and Freddie. In 2011 it sued 18
lenders, and J.P. Morgan was only the fourth to settle.
To be sure, the New Century deal was among J.P.
Morgan's worst performers, and other mortgage-backed securities it issued at
the time have held up better. An improving economy and housing market have
lifted many mortgage bonds sold in 2006 and 2007.
But that is of little consolation to Freddie Mac,
which bought more than a third of the $910 million New Century bond deal in
2006 and still is sitting on losses.
The group of loans backing Freddie's chunk of the
deal had more high-risk loans than the rest of the pool. Nearly 44% of
Freddie's piece had loan-to-value ratios between 80% and 100%, compared with
31% for the rest, according to the deal prospectus.
What's more, nearly half the loans backing the New
Century deal were from California and Florida, two states hit hard by the
housing bust. Of the 4,209 loans in the bond, more than half have some
experienced distress, according to BlackBox data.
Three debt-rating firms gave the top slice of the
deal AAA ratings. But as the housing market soured, a series of downgrades
starting in 2007 took them all into "junk" territory by July 2011. As of
last month, nearly a quarter of the principal of the underlying loans in the
deal had been wiped out, with a third of the remaining balance delinquent or
in some stage of foreclosure, according to BlackBox.
Continued in article
From the CFO Journal's Morning Ledger on October 28, 2013
J.P. Morgan settlement puts government in tight spot Will the U.S. government have to refund
J.P. Morgan part
of the bank’s expected $13 billion payment over soured mortgage securities?
The question is the biggest stumbling block to completing the record
settlement between the bank and the Justice Department,
writes the WSJ’s Francesco Guerrera.
The crux of the issue is whether the government can go
after J.P. Morgan for (alleged) sins committed by others. And investors,
bankers and lawyers are watching the process closely, worried that it could
set a bad precedent for the relationship between buyers, regulators and
creditors in future deals for troubled banks.
Thirteen billion dollars
requires some perspective. The record amount that
JPMorgan Chase (JPM)
has tentatively agreed to pay the
U.S. Department of Justice, to settle civil investigations into
mortgage-backed securities it sold in the runup to the 2008 financial
crisis, is equal to the gross domestic product of Namibia. It’s more
than the combined salaries of every athlete in every major U.S.
professional sport, with enough left over to buy every American a
stadium hotdog. More significantly to JPMorgan’s executives and
shareholders, $13 billion is equivalent to 61 percent of the bank’s
profits in all of 2012. Anticipating the settlement in early October,
the bank recorded its first quarterly loss under the leadership of Chief
Executive Officer Jamie Dimon.
That makes it real money, even for the
country’s biggest bank by assets. Despite this walloping, there’s reason
for the company to exhale. The most valuable thing Dimon, 57, gets out
of the deal with U.S. Attorney General Eric Holder is clarity. The
discussed agreement folds in settlements with a variety of federal and
state regulators, including the Federal Deposit Insurance Corp. and the
attorneys general of California and New York. JPMorgan negotiated a
similar tack in September, trading the gut punch of a huge headline
number—nearly $1 billion in penalties related to the 2012 London Whale
trading fiasco—for the chance to resolve four investigations in two
countries in one stroke. In both cases, the bank’s stock barely budged;
its shares have returned 25 percent this year, exactly in line with the
performance of Standard & Poor’s 500-stock index.
That JPMorgan is able to withstand
penalties and regulatory pressure that would cripple many of its
competitors attests both to the bank’s vast resources and the influence
of the man who leads it. The sight of Dimon arriving at the Justice
Department on Sept. 26 for a meeting with the attorney general
underscored Dimon’s extraordinary access to Washington
decision-makers—although the Wall Street chieftain did have to humble
himself by presenting his New York State driver license to a guard on
the street. As news of the settlement with Justice trickled out, the
admirers on Dimon’s gilded list rushed to his defense, arguing that he
struck the best deal he could. “If you’re a financial institution and
you’re threatened with criminal prosecution, you have no ability to
negotiate,”
Berkshire Hathaway (BRK/A)
Chairman Warren Buffett told
Bloomberg TV. “Basically, you’ve got to be like a wolf that bares its
throat, you know, when it gets to the end. You cannot win.”
The challenges facing Dimon and his
company are far from over. With the $13 billion payout, JPMorgan is
still the subject of a criminal probe into its mortgage-bond sales,
which could end in charges against the bank or its executives. And other
federal investigations—into suspected bribery in China, the bank’s role
in the Bernie Madoff Ponzi scheme, and more—are ongoing.
The ceaseless scrutiny has tarnished
Dimon’s public image, perhaps irreparably. Once seen as the white knight
of the financial crisis, he’s now the executive stuck paying the bill
for Wall Street’s misdeeds. And as the bank’s legal fights drag on, it’s
worth asking just how many more blows the famously pugnacious Dimon can
take.
Although the $13 billion settlement
would amount to the largest of its kind in the history of regulated
capitalism, it looks quite different broken into its component pieces.
While the relative amounts could shift, JPMorgan is expected to pay
fines of only $2 billion to $3 billion for misrepresenting the quality
of mortgage securities it sold during the subprime housing boom.
Overburdened homeowners would get $4 billion; another $4 billion would
go to the Federal Housing Finance Agency, which regulates
Freddie Mac (FMCC)
and
Fannie Mae (FNMA);
and about $3 billion would go to investors who lost money on the
securities, Bloomberg News reported.
JPMorgan will only pay fines (as
distinct from compensation to investors or homeowner relief) related to
its own actions—and not those of Bear Stearns or Washington Mutual, the
two troubled institutions the bank bought at discount-rack prices during
the crisis. Aside from shaving some unknown amount off the final
settlement, this proviso enhances Dimon’s reputation as the shrewdest
banker of that era. In 2008, with the backing of the U.S. Department of
the Treasury and the Federal Reserve, who saw JPMorgan as a port in a
storm, Dimon got the two properties for just $3.4 billion. Extending
JPMorgan’s retail reach overnight into Florida and California, Bear and
WaMu helped the bank become the largest in the U.S. by 2011. The
portions of the settlement attributable to their liabilities are almost
certainly outweighed by the profits they’ve brought and will continue to
bring.
Jensen Comment
The smoking gun in each state is not obvious. Some states are low in
opportunities for skilled workers who typically have an easier time finding
full-time work. Nevada. The sunshine states typically have more
opportunities for restaurant and travel employment notorious for part-time
work. California, Illinois, and Rhode Island have immense fiscal problems
that spill over into high taxation that discourages business expansion.
Obamacare especially discourages full-time employment in small and
medium-sized companies, but this is a problem in all 50 states.
Mysteries remain. Why aren't Texas, Alabama, Vermont, and Mississippi in the
list above? I don't know!
There has been a distinctive odor of hype lately
about the national jobs report for June. Most people will have the
impression that the 288,000 jobs created last month were full-time. Not so.
The Obama administration and much of the media
trumpeting the figure overlooked that the government numbers didn't
distinguish between new part-time and full-time jobs. Full-time jobs last
month plunged by 523,000, according to the Bureau of Labor Statistics. What
has increased are part-time jobs. They soared by about 800,000 to more than
28 million. Just think of all those Americans working part time, no doubt
glad to have the work but also contending with lower pay, diminished
benefits and little job security.
On July 2 President Obama boasted that the jobs
report "showed the sixth straight month of job growth" in the private
economy. "Make no mistake," he said. "We are headed in the right direction."
What he failed to mention is that only 47.7% of adults in the U.S. are
working full time. Yes, the percentage of unemployed has fallen, but that's
worth barely a Bronx cheer. It reflects the bleak fact that 2.4 million
Americans have become discouraged and dropped out of the workforce. You
might as well say that the unemployment rate would be zero if everyone quit
looking for work.
Last month involuntary part-timers swelled to 7.5
million, compared with 4.4 million in 2007. Way too many adults now depend
on the low-wage, part-time jobs that teenagers would normally fill. Federal
Reserve Chair Janet Yellen had it right in March when she said: "The
existence of such a large pool of partly unemployed workers is a sign that
labor conditions are worse than indicated by the unemployment rate."
There are a number of reasons for our predicament,
most importantly a historically low growth rate for an economic "recovery."
Gross domestic product growth in 2013 was a feeble 1.9%, and it fell at a
seasonally adjusted annual rate of 2.9% in the first quarter of 2014.
But there is one clear political contribution to
the dismal jobs trend. Many employers cut workers' hours to avoid the
Affordable Care Act's mandate to provide health insurance to anyone working
30 hours a week or more. The unintended consequence of President Obama's
"signature legislation"? Fewer full-time workers. In many cases two people
are working the same number of hours that one had previously worked.
Since mid-2007 the U.S. population has grown by
17.2 million, according to the Census Bureau, but we have 374,000 fewer jobs
since a November 2007 peak and are 10 million jobs shy of where we should
be. It is particularly upsetting that our current high unemployment is
concentrated in the oldest and youngest workers. Older workers have been
phased out as new technologies improve productivity, and young adults who
lack skills are struggling to find entry-level jobs with advancement
opportunities. In the process, they are losing critical time to develop
workplace habits, contacts and new skills.
Most Americans wouldn't call this an economic
recovery. Yes, we're not technically in a recession as the recovery began in
mid-2009, but high-wage industries have lost a million positions since 2007.
Low-paying jobs are gaining and now account for 44% of all employment growth
since employment hit bottom in February 2010, with by far the most
growth—3.8 million jobs—in low-wage industries. The number of long-term
unemployed remains at historically high levels, standing at more than three
million in June. The proportion of Americans in the labor force is at a
36-year low, 62.8%, down from 66% in 2008.
Part-time jobs are no longer the domain of the
young. Many are taken by adults in their prime working years—25 to 54 years
of age—and many are single men and women without high-school diplomas. Why
is this happening? It can't all be attributed to the unforeseen consequences
of the Affordable Care Act. The longer workers have been out of a job, the
more likely they are to take a part-time job to make ends meet.
The result: Faith in the American dream is eroding
fast. The feeling is that the rules aren't fair and the system has been
rigged in favor of business and against the average person. The share of
financial compensation and outputs going to labor has dropped to less than
60% today from about 65% before 1980.
Why haven't increases in labor productivity
translated into higher household income in private employment? In part
because of very low rates of capital spending on new plant and equipment
over the past five years. In the 1960s, only one in 20 American men between
the ages of 25 and 54 was not working. According to former Treasury
Secretary Larry Summers, in 10 years that number will be one in seven.
The lack of breadwinners working full time is a
burgeoning disaster. There are 48 million people in the U.S. in low-wage
jobs. Those workers won't be able to spend what is necessary in an economy
that is mostly based on consumer spending, and this will put further
pressure on growth. What we have is a very high unemployment rate, a slow
recovery and across-the-board wage stagnation (except for the top few
percent). According to the Bureau of Labor Statistics, almost 91 million
people over age 16 aren't working, a record high. When Barack Obama became
president, that figure was nearly 10 million lower.
The great American job machine is spluttering. We
are going through the weakest post-recession recovery the U.S. has ever
experienced, with growth half of what it was after four previous recessions.
And that's despite the most expansive monetary policy in history and the
largest fiscal stimulus since World War II.
In June 1997, THE Journal
published an article called “Computers
in Education: A Brief History.” That article is
still one of the most popular on our website, but — to put it mildly — a lot
has changed in ed tech since then. This is less a sequel to that article
than a companion piece that dips back into the past, traces the trends of
the present and looks to the future, all with an eye toward helping
districts find the right device for their classrooms.
When thinking about the role of technology in
education, the logical starting point is exploring why the connection
between computers and education was ever made in the first place. My
starting point is Logo, an educational programming language designed in 1967
at Bolt Beranek and Newman (BBN) by Danny Bobrow, Wally Feurzeig, MIT
professor Seymour Papert and Cynthia Solomon. This language was a derivative
of the AI programming language LISP, and ran on the PDP-1 computers from
Digital Equipment Corp. Seymour Papert had studied with constructivist
pioneer Jean Piaget, and felt that computers could help students learn more
by constructing their own knowledge and understanding by working firsthand
with mathematical concepts, as opposed to being taught these concepts in a
more directed way.
In 1973 the Xerox Palo Alto Research Center
introduced the Alto computer, designed as the world’s first personal
computer. At Xerox, Papert’s push to turn kids into programmers led to the
development of Smalltalk — the first extensible, object-oriented programming
language — under the direction of Alan Kay. Because these early computers
were captive in the research lab, local students were brought in to explore
their own designs.
Another path to educational technology began that
same year, when the Minnesota Educational Computing Consortium (MECC) was
started in an old warehouse in Minneapolis. Part of the state's educational
software push, the original programs were simulations designed for a
timeshare system running on a mainframe, with terminals placed in schools.
Using this system, students could take a simulated journey along the Oregon
Trail, for example, and learn about the importance of budgeting resources
and other challenges that faced the early pioneers. Another simulation let
the students run a virtual lemonade stand. Years later, the MECC software
was rewritten for early personal computers.
In the early days, educational computing was
focused on the development of higher-order thinking skills.
Drill-and-practice software only became commonplace much later, with the
release of inexpensive personal computers. By the late 1970s, personal
computers came to market and started showing up in schools. These included
the Commodore PET (1977) and Radio Shack TRS-80 (1977), among many other
systems. But the computer that ended up having the greatest impact on
schools at the time was the Apple II, also introduced in 1977. One
characteristic of the Apple II was that it used floppy disks instead of
cassette tapes for storing programs and also supported a graphical display,
albeit at a low level. The first generation of computers in schools was not
accompanied by very much software, though. The customer base was not yet big
enough to justify the investment.
The Uses of Ed Tech, Past and Present
In 1980, Robert Taylor wrote a book,
The Computer in the School: Tutor, Tool, Tutee. The
underlying idea in this book was that students could use computers in three
different ways: 1) As a tutor running simulations or math practice, for
example; 2) as a tool for tasks like word processing; or 3) as a tutee,
meaning the student teaches the computer to do something by writing a
program in Logo or BASIC. This model touches on several pedagogical models,
spanning from filling the mind with information to kindling the fire of
curiosity. Even though technologies have advanced tremendously in the
intervening years, this model still has some validity, and some contemporary
technologies are better suited for some pedagogies than others.
House committee passes measure giving disabled tax-free
savings accounts
The House Ways and Means Committee has passed a measure that would allow
people with disabilities to hold savings accounts that are tax free. A
similar measure is on track to be passed in the Senate. It is widely
supported in both chambers.
The Hill
(7/31)
Jensen Comment
Jensen Comment and Question
This is currently a sick joke because under long-standing low-interest
policies of the Fed savings accounts pay virtually nothing to be taxed.
Also I wonder what proportion of the disabled people are among the 48% of
USA taxpayers who pay zero income taxes?
The bill to make savings accounts for the disabled appears to me to be a
political stunt rather than one of economic caring.
This bill also complicates taxation on joint returns where the income of
the disabled spouse in general is a very small proportion of the taxable
income of the bread-winning spouse. What if the
a huge proportion a couple's $10 million in savings is transferred to the
savings accounts of the disabled spouse? Will these savings then be tax free
if the couple files separate returns?
I don't know if the bill places a limit on the
amount of savings income that can be tax exempt.
Jensen Comment
Rachel Shteir suggests that the sex trade would be less of a problem if
prestigious universities were cheaper for poor and middle-class families.
Possibly for some young women and men in the sex trades this is true, but for
those like Belle Knox, who turn pornography or prostitution into big money. A
college diploma becomes an insurance policy against poverty or serves as an
ego-satisfying accomplishment for Belle Knox.
It seems to me that how students finance their higher education should not be
a major concern. Most students engaged in the sex trades are not media stars
like Belle Knox and/or are not prostitutes bringing their johns to campus.
One issue is when students commit crimes to finance their educations.
Pornography is not necessarily a crime like prostitution, bank robbery, and drug
dealing. Students should probably be expelled for crimes that would get college
employees fired. For example, a faculty member who is convicted prostitution or
bank robbery would probably get fired from virtually any USA college, although
this may not be the case for re-hiring after the sentence is served. To my
knowledge Belle Knox, however, is not being expelled from Duke University.
A year after vowing to take more of its
law-enforcement cases to trial, Securities and Exchange Commission officials
now say the agency will increasingly bypass courts and juries by prosecuting
wrongdoers in hearings before SEC administrative law judges, also known as
ALJs. "I think you'll see that more and more in the future," SEC Enforcement
Director Andrew Ceresney told a June gathering of Washington lawyers, adding
that insider trading cases were especially likely to go before
administrative judges.
The 2010 Dodd-Frank law vastly expanded
SEC discretion to charge wrongdoers administratively, and this summer the
agency increased the number of administrative law judges on staff to five
from three in anticipation of an increased workload. This follows a recent
string of SEC jury-trial losses in federal courts, though agency officials
insist the timing is coincidental.
Coincidence or not, a surge in
administrative prosecutions should alarm anyone who values jury trials, due
process and the constitutional separation of powers. The SEC often prefers
to avoid judicial oversight and exploit the convenience of punishing alleged
lawbreakers by administrative means, but doing so is unconstitutional. And
if courts allow the SEC to get away with it, other executive-branch agencies
are sure to follow.
To begin with the obvious,
executive-branch agencies like the SEC are not courts established under
Article III of the Constitution. These agencies exercise legislative power
through rule-making and executive power through prosecution, but the
Constitution gives them no judicial power to decide cases and
controversies—especially not the very cases they are prosecuting. Executive
agencies usurp that judicial power when they shunt penal law-enforcement
prosecutions into their own captive administrative hearings.
Nearly 70 years ago, the Administrative
Procedures Act established today's system of quasi-judicial tribunals
overseen by administrative law judges. But these tribunals are not courts,
and the administrative law judges are not life-tenured judicial officers
appointed under Article III of the Constitution. They are executive-branch
employees who conduct hearings at the direction of agency leaders following
procedural rules dictated by the agencies themselves.
The SEC's rules favor the prosecution. The
rules give the accused only a few months to prepare a defense—after SEC
prosecutors have typically spent years building the case—and they give
administrative law judges only a few months after the hearing to evaluate
the mountains of evidence presented and write detailed decisions that
typically run several dozens of single-spaced pages. The rules also allow
SEC prosecutors to use hearsay and other unreliable evidence, and they
severely limit the kinds of pretrial discovery and defense motions that are
routinely allowed in courts.
Administrative hearings also do not have
juries, even when severe financial penalties and forfeitures are demanded.
And because these hearings are nominally civil rather than criminal, guilt
is determined by a mere preponderance of the evidence—the lightest
evidentiary burden known to modern law—rather than beyond reasonable doubt.
In short, while administrative prosecutions create the illusion of a fair
trial, and while administrative law judges generally strive to appear
impartial, these proceedings afford defendants woefully inadequate due
process.
More important, the proceedings violate
the Constitution's separation of powers. Every phase of the proceeding, and
every government official involved, is controlled by the agency in its role
as chief prosecutor. The SEC assigns and directs a team of employees to
prosecute the case. It assigns another employee, the administrative law
judge, to decide guilt or innocence and to impose sanctions. Appeals must be
taken to the same SEC commissioners who launched the prosecution, and their
decision is typically written by still other SEC employees.
The entire process ordinarily takes years,
during which many SEC targets are bankrupted by legal costs and their
inability to find work with reputable companies. Only after SEC
commissioners decide all appeals can the accused finally seek relief from a
federal court. But appeals rarely succeed because the law requires courts to
defer to the agency's judgment, especially on disputed facts.
The SEC used to employ administrative
proceedings for relatively uncontroversial purposes such as preventing
suspicious stock offerings, suspending rogue brokers or consummating
settlements where no court involvement was necessary. But through a series
of laws beginning in the 1980s and continuing through
Dodd-Frank,
the SEC has been transformed from a conventional regulator into a penal
law-enforcement prosecutor with enormous power to punish private citizens
and businesses. In 2013 the agency obtained a record $3.4 billion in
monetary sanctions, and it now routinely seeks million-dollar sanctions
against accused wrongdoers.
On its website, the SEC accurately
describes itself as "first and foremost" a law-enforcement agency. As such,
the agency should play no role in deciding guilt and meting out punishment
against the people it prosecutes. Those roles should be reserved for juries
and life-tenured judges appointed under Article III of the Constitution.
Today's model of penal SEC law enforcement is categorically unsuited for
rushed and truncated administrative hearings in which the agency and its own
employees serve as prosecutor, judge and punisher. Such administrative
prosecution has no place in a constitutional system based on checks and
balances, separation of powers and due process.
Mr. Ryan, a former assistant director of enforcement
at the SEC, is a partner with King & Spalding LLP, and his clients include
companies and individuals involved in SEC law-enforcement proceedings.
Auditors experience significant problems auditing
complex accounting
estimates, and this increasingly puts financial reporting quality at
risk. Based on analyses of the specific errors that auditors commit, we
propose that auditors need to be able to think more broadly and
incorporate information from a variety of sources in order to improve
audit quality for these important accounts. We experimentally
demonstrate that a deliberative mindset intervention improves auditors’
ability to identify unreasonable estimates by improving their ability to
identify and incorporate into their analyses contradictory information
from other parts of the audit. We perform additional analyses to
demonstrate that our intervention improves auditor performance by
causing them to think differently rather than simply to work harder. We
demonstrate that thinking more broadly can improve the identification of
unreasonable estimates and, in doing so, we provide new directions for
addressing audit quality issues.
English Abstract:
The Balanced Scorecard is one of the most well-known concepts in the field
of management accounting and
control. Since its introduction in 1992, the Balanced Scorecard has been the
subject of much attention in academic research and in practice. The concept
has diffused to many countries and regions, including Norway, where the
concept is often referred to as "balansert målstyring". This article
presents a case study of the concept's evolution pattern in the Norwegian
context. The study shows that the Balanced Scorecard concept was very
popular around the turn of the century, but also that the concept's
popularity has not fallen as much as would be predicted by management
fashion theory. Instead, the data show that the concept has become "good
practice" in Norway. It can therefore be argued that the concept has become
institutionalized, and that it has become an "enduring fashion". Towards the
end of the paper these results are discussed in relation to extant research
on Balanced Scorecard and theories of management fashions.
U.S. retailers are facing a steep and persistent
drop in store traffic, which is weighing on sales and prompting chains to
slow store openings as shoppers make more of their purchases online.
Aside from a small uptick in April, shopper visits
have fallen by 5% or more from a year earlier in every month for the past
two years, according to ShopperTrak, a Chicago-based data firm that records
store visits for retailers using tracking devices installed at 40,000 U.S.
outlets. Even as warmer temperatures replace the harsh winter weather this
year, store visits fell by nearly 7% in June and nearly 5% in July,
according to ShopperTrak.
New data from Moody's Investors Service shows that
the shift to online sales has prompted retailers to scale back store
openings and will likely lead them to pare back their fleets even more in
coming years, as more than $70 billion in lease debt expires by 2018. Growth
in store counts at the 100 largest retailers by revenue has slowed to less
than 3% from more than 12% three years ago, according to Moody's.
The pressure comes as consumer tastes are changing.
Instead of wandering through stores and making impulse purchases, shoppers
use their mobile phones and computers to research prices and cherry-pick
promotions, sticking to shopping lists rather than splurging on unneeded
items. Even discount retailers are finding it harder to boost sales by
lowering prices as many low-income consumers struggle to afford the basics
regardless of the price.
Continued article
Jensen Comment
Here in the boondocks we buy many of our grocery items and virtually all of our
clothing online. We love Amazon Prime and Amazon's very efficient and free
return service.
I don't buy bigger items online that are more likely to need service. For
this I love the Sears local-store for things like lawn mowers, leaf blowers,
lawn sweepers, power trimmers, snow throwers, chain saws, refrigerators,
freezers, etc. I especially like Sears home service warranties on heavy items
like snow throwers, lawn sweepers, dehumidifiers (for the basement), and air
conditioners. A Sears home service warranty includes one free annual at-home
maintenance and cleaning service for things like filters on air conditioners,
freezers, and refrigerators. Years ago I grew tired of over-stuffed
refrigerators. Even though there are only two of us in the cottage, in the
basement we have two extra large refrigerators plus an upright freezer. Since
Erika is troubled by stairs we also have an elevator that I recommend highly for
multi-story homes. Retirement is not all that bad.
Question
What is the most useful thing that I now use that I never owned before
retirement?
Answer
The bucket loader on my tractor. Back surgeons must hate bucket loaders. An 80lb
bag of top soil is now a piece of cake as long as the store workers load it into
the back of my jeep. At home I simply roll heavy things into the bucket loader.
How did I ever manage in my previous life without a bucket loader?
Jensen Comment
When plagiarism is detected, professors and celebrities seem to me to be the
least likely to lose their jobs or pay a heavy price. Punishments vary, but they
seldom are expelled. Doctoral students may pay a heavy price by having theses
rejected and a scarlet letter in the job market.
An investigation into plagiarism allegations
against an Arizona State University professor of history in 2011 found him
not guilty of deliberate academic misconduct, but the case remained
controversial. The chair of his department’s tenure committee resigned in
protest and other faculty members spoke out against the findings, saying
their colleague – who recently had been promoted to full professor – was
cleared even though what he did likely would have gotten an undergraduate in
trouble.
Now, Matthew C. Whitaker has written a new book,
and allegations of plagiarism are being levied against him once again.
Several blogs – one anonymously, and in great detail – have documented
alleged examples of plagiarism in the work. Several of his colleagues have
seen them, and say they raise serious questions about Whitaker’s academic
integrity.
Continued in article
Celebrities often do not care very much when their plagiarism is detected,
especially if they've already achieved celebrity status. Vladimir Putin not only
did not write a single word in his Ph.D. thesis, it's not clear that he ever
read a single word in his Ph.D. thesis ---
http://www.trinity.edu/rjensen/Plagiarism.htm#Celebrities
I think he could care less that the world knows he cheated for his doctorate
(which is not all that uncommon in Russia).
Arianna Huffington is set to appear at the
University of Virginia this week to meditate on its famed “lawn” with
spiritualist Deepak Chopra. But a petition started by a former graduate
student there calls for Huffington’s invitation to be rescinded, citing
allegations that she once plagiarized a revered professor’s work.
The Massachusetts Institute of Technology had the
most instances of digital piracy and other copyright infringements among
American colleges and universities in 2008 for the second year in a row,
according to a report released by Bay-TSP, a
California company that offers tracking applications for copyrighted works.
There are times when a single, unexpected
death sparks a change in medical practice. In 2012 a 12-year-old boy named
Rory Staunton died after being misdiagnosed in a New York City emergency
room. Multiple physicians missed the symptoms, signs and lab results
pointing to a streptococcal bacterial infection that led to septic shock and
overwhelmed Rory's body. The tragedy prompted New York state in January 2013
to introduce "Rory's regulations," a set of stringent protocols aimed at
preventing similar incidents in hospitals.
Comparable initiatives to prevent
misdiagnosis have not happened on a national level—but there might be reason
to expect change soon.
New research my colleagues and I published
in April in the journal BMJ Quality and Safety shows the extent of the
problem. Based on previous studies of patients seeking outpatient care, we
extrapolated data on diagnostic error to the entire U.S. adult population.
Each year an estimated 5% are misdiagnosed based on currently available
evidence.
This may sound like a decent track
record—95% accuracy—given that doctors are grappling with more than 10,000
diseases in patients who present a staggering array of symptoms. But a 5%
error rate means that more than 12 million adults are misdiagnosed every
year, and our study may understate the magnitude.
Still, after years of taking a back seat
to problems such as medication and treatment errors, misdiagnosis is getting
attention. In 2011 my research colleague in projects on misdiagnosis Mark
Graber founded the nonprofit Society to Improve Diagnosis in Medicine, which
now holds an annual medical conference on diagnostic error. More recently,
the Institute of Medicine, an influential branch of the National Academy of
Sciences that advises Congress on health care, is preparing a comprehensive
action plan and hosting its second major expert meeting on Thursday and
Friday. In 2015 the IOM will issue a report on misdiagnosis.
Meantime, the U.S. health-care community
can take steps to reduce the problem.
The first is to improve communication
between physicians and patients. Patients tend to be the best source of
information for making a diagnosis, but often essential doctor-patient
interactions such as history and examination are rushed, leading to poor
decisions. As new forms of diagnostic and information technologies are
implemented, managing large amounts of data will become increasingly
complex, and physicians could become more vulnerable to misdiagnosis.
This problem exists in large part because
time pressures and paperwork often force physicians to spend more time
struggling to get reimbursed than talking with patients. Extra hours spent
pursuing a correct diagnosis are not compensated beyond the payment for the
visit, an already small sum for primary-care physicians.
Patients can't solve this problem, but
insurers can streamline administrative paperwork and re-examine the logic
behind reimbursement policies. Hospital systems can help by providing
high-tech decision support tools and encouraging physicians to collaborate
on tough cases and learn from missed opportunities.
Metrics also need work. As the old
business adage goes, you can't manage what you don't measure. Yet most
health-care organizations aren't tracking misdiagnosis beyond malpractice
claims. Doctors need mechanisms to provide and receive timely feedback on
the quality and accuracy of our diagnoses, including better patient
follow-up and test-result tracking systems.
Electronic health records will help
eventually, but slow innovation in this area has frustrated many physicians.
And most doctors still lack access to electronic patient data gathered by
other physicians. Doctors can make a more informed diagnosis when they can
see the disease progression or learn what other doctors have discovered
about the patient.
Finally, patients must start keeping good
records of each meeting with a doctor, bringing the information to
subsequent medical appointments and following up with the physician if their
condition doesn't improve. No news from the doctor is not necessarily good
news.
There is much we don't understand about
the burden, causes and prevention of misdiagnosis. The IOM report will spur
progress, but health-care providers, patients, hospitals and payers can all
help. The health outcomes of at least 12 million Americans each year depend
on it.
Dr. Singh is chief of Health Policy, Quality and
Informatics at the Michael E. DeBakey VA Medical Center, and an associate
professor at Baylor College of Medicine.
Jensen Comment
For me this raises the question of why so many mistakes are made by
professionals. For auditors and physicians the reason may be budgeted time and
money.
Auditors are often led by budgets to conduct cheaper analytical reviews as
opposed to detail testing. Physicians are sometimes led by third party insurance
payment bounds (e.g., what Medicare) will pay for an office visit) to hurry
their time spent with patients.
There's an exploding trend to have patients screened by non-physicians in HMO
factories and even in physician offices where physician assistants do much of
the initial screening.
In CPA auditing by big firms it's systemic to send out teams of neophyte
auditors, many of them newly graduated, to do a lot of the audit work under
supervision that is sometimes questionable.
TheUS Public
Company Accounting Oversight Boardhas
issued a Release discussing the provision of the Sarbanes-Oxley Act of 2002
that authorizes the PCAOB to impose sanctions on registered public
accounting firms and their supervisory personnel for failing to reasonably
supervise associated persons.
“Through its inspections and investigations,
the PCAOB has observed that supervision processes within firms are
frequently not as robust as they should be, and that supervisory
responsibilities are often not as clearly assigned as they should be," said
PCAOB Acting Chairman Daniel L. Goelzer. "This Release seeks to highlight
the Board’s views on the scope for using the authority provided in the Act
to address those problems."
The PCAOB issued a two-part Release
addressing matters related to the application of Section 105(c)(6) of the
Sarbanes-Oxley Act, which authorizes the PCAOB to sanction registered firms
and their supervisory personnel for failing to reasonably supervise
associated persons who violate certain laws, rules, or standards.
Part I of the Release serves to highlight
the scope of the application of Section 105(c)(6) for the information of
registered firms, their associated persons, and the public generally. Part I
is not a rule or rule proposal, and the PCAOB is not seeking comment on Part
I.
Part II of the Release discusses concepts
relating to possible rulemaking or standard setting that, without imposing
any new supervision responsibilities, would require firms to make and
document clear assignments of the supervision responsibilities that are
already required to be part of any audit practice.
The PCAOB is considering whether such rules
would further the public interest and protect investors by increasing
clarity about who, within a firm, is accountable for various
responsibilities that bear on the quality of a firm’s audits.
The PCAOB is soliciting public comment on
the concepts discussed in Part II. The comment period is open until Nov 3,
2010.
Finally, on Friday November 22nd, the
PCAOB again
publicly reprimanded Deloitte for its failure to
adequately address quality control problems related to its audit practice by
releasing the previously nonpublic portions of the PCAOB’s April 16, 2009
inspection report. And as usual, we see that this audit “emperor has no
clothes.” Is an audit being done in name only? The PCAOB raised
the following serious audit quality concerns in its report (PCAOB Release
No. 104-2009-051A):
Did Deloitte perform appropriate
procedures to audit significant estimates, including evaluating the
reasonableness of management's assumptions and testing the data
supporting the estimates (page 10).
How appropriate was Deloitte's
approach in using the work of specialists and data provided by service
organizations when auditing significant management estimates (page 11).
Specifically, the PCAOB raised questions about Deloitte’s testing of
controls and data, audit documentation, etc.
Did Deloitte fail to obtain
sufficient competent evidential matter, at the time it issued its audit
report, to support its audit opinions, specifically as it related to the
exercise of due care, professional skepticism, supervision and review
(page 12).
What’s
really depressing about the these audit quality problems, is that they were
almost exactly the same as those noted in the PCAOB’s
May 19, 2008 report (pages 12
through 16). Also, problematic is the waning interest of the popular press
in these PCAOB report releases, suggesting that GAFS’ strategy to downplay
and even ignore the PCAOB just may be working.
We’ve all heard the expression that “cash
is king.” This well-worn phrase often is used when
assessing the financial health or investment prospects of a firm.
Those of you that have followed the Grumpies for a while, may recall
a past rant on how companies increasingly “manage” reported cash
balances and cash flows (see
What’s Up With Cash Balances?). In that
diatribe, we described the games that global financial managers now
play with cash to overstate performance, as well as the competence
decline in entry-level accountants in the auditing and reporting of
cash. Unfortunately, things have not improved during the past three
years from either an academic OR a real world perspective.
First, the bad news from the
classroom front. A month ago, I surveyed my summer graduate
students (Master of Accounting candidates) on their undergraduate
accounting/auditing education in the area of cash. These students,
most of whom attended well-regarded bachelor degree programs, almost
unanimously reported that their accounting instructors devoted
little or no time to cash or related controls (e.g., bank
reconciliations, etc.), and none had even heard of a
proof of cash. When it came to cash
disclosures, the results were equally troubling. None had ever been
exposed to cash policy disclosures or the notion of restricted cash
balances. Obviously, cash is NOT king to some of my ivory tower
accounting colleagues…
Surely, it can’t be this bad in
the real world, right? WRONG! The recent fascination with
corporate inversions, transactions in
which U.S. companies make overseas acquisitions to reduce their tax
burden on income earned abroad, has drawn this grumpy old
accountant’s attention to yet another potentially misleading
disclosure…this time one associated with “trapped cash.”
Trapped cash generally refers to corporate
cash balances held in wholly-owned foreign subsidiaries.
The Bigger Sin: “Trapped
Cash” or Non-Payment of Taxes?
So what’s the problem? To avoid U.S. taxation of
foreign income earned abroad, companies commonly assert that they
have no intention ofreturning the “trapped cash”
associated with foreign earnings to the United States. Here are a
couple of examples from three well-known tax minimizers:
“The Company intends to reinvest
these earnings indefinitely in its foreign subsidiearies.”
— Cisco 2013 10-K
“However, our intent is to
permanently reinvest these funds outside the U.S. and our
current plans do not demonstrate a need to repatriate them to
fund our U.S. operations.”
— Google 2013 10-K
“As of June 30, 2013, we have not
provided deferred U.S. income taxes or foreign witholding taxes
on temporary differences of approximately $76.4 billion
resulting from earnings for certain non-U.S. subsidiaries which
are permanently reinvested outside the U.S.”
— Microsoft 2013
10-K
My beef is not with their obvious and
well-publicized tax avoidance practices, but rather that they report
“trapped cash” balances as unrestricted cash in
their consolidated balance sheets. Clearly, such cash balances are
not available for general corporate use as intimated by Google
above, therefore the use of these liquid assets is
restricted to the jurisdiction where the cash resides.
Consequently, restrictions on “trapped cash” and related assets
should be reported in the financial statements, and 10Q and 10K
disclosures expanded to enhance reporting transparency.
The Mystery is Why Bank of America Does not Appeal It's New $17 Billion Fine
All the Way to the Supreme Court
Why isn't former Treasury Secretary Hank Paulson being punished?
These Countrywide Financial mortgage lending crimes were committed before
Paulson foreced BofA to buy out Countrywide Financial.
After the subprime collapse then BofA CEO, Ken Lewis, most certainly did not
want to use BofA money to stop the free fall of Merrill Lynch and Countrywide
Financial. However, U.S. Treasury Secretary Hank Paulson resorted to personal
blackmail according to Ken Lewis.
"Bank Chief Tells of U.S. Pressure to Buy Merrill Lynch," by Louise Story
and Jo Becker, The New York Times, June 11. 2009 ---
http://www.nytimes.com/2009/06/12/business/12bank.html
If you thought the last financial crisis was
expensive, wait until taxpayers see how much it costs to rescue banks when
they have to do it all on their own. The U.S. Department of Justice aims to
extract as much as $17 billion from Bank of America BAC +0.26% for the crime
of taking problems off Washington's hands in 2008.
Regulators were high-fiving when the bank bought
Countrywide Financial and then Merrill Lynch during the crisis. But now
Washington seems intent on making bank shareholders pay again for the
problems that caused these firms to need a rescue in the first place. Come
the next crisis, CEOs will know to run in the other direction when the
government offers a deal on a failing firm. And when private capital flees,
guess whose money will be used to prop up the banking system.
In some earlier post-crisis settlements, the feds
at least pretended that the cases were about making mortgage investors or
borrowers whole. But the pending Bank of America settlement appears to
consist largely of a penalty for alleged mortgage sins committed by the two
failing companies the feds wanted the bank to buy, and in one case pressured
it to buy.
The new game at Justice seems to be to come up with
a big dollar figure to be paid by bank shareholders—big enough to persuade
progressives that the department is being tough on Wall Street—and then fill
in the blanks on the alleged legal violations. So we can't say for sure what
the final deal will claim the bank did. But BofA must be taking the fall for
Countrywide and Merrill Lynch because the bank itself originated only 4% of
the bad mortgage paper for which it is now responsible.
The bank has already shovelled out roughly $60
billion in mortgage settlements to various public and private parties, far
more than any other bank. Now the feds are coming back to further punish
Bank of America for its foolish acquisitions. But at the time the bank made
these deals, the regulators were celebrating.
In 2008 Federal Reserve officials were concerned
about their exposure to Countrywide. As BofA prepared for an early July
closing on its purchase of Countrywide, New York Fed banking supervisor
Arthur Angulo told the Federal Open Market Committee that Countrywide's use
of one Fed lending facility "should come to a close next week, knock on
wood."
In his recent memoir, former New York Fed President
and Treasury Secretary Timothy Geithner, who thought Countrywide was a
systemic threat, wrote that Bank of America's investment "eased fears of a
collapse."
When the bank agreed to buy Merrill a few months
later, regulators were once again gratified. St. Louis Fed President James
Bullard said at a September 16 meeting of the Federal Open Market Committee
that the Merrill deal had removed one of the "large uncertainties looming
over the economy." Regulators were so pleased that when BofA CEO Ken Lewis
later expressed a desire to back out of the deal, then-Treasury Secretary
Hank Paulson threatened to fire him and gave the bank another $20 billion in
TARP rescue money to absorb Merrill.
Bank of America finished repaying its $45 billion
in TARP loans in 2009. But we wonder if its shareholders will ever stop
paying Washington for the deals Washington wanted—and even demanded—during
the crisis.
SUMMARY: Top executives of Florida computer-equipment company QSGI
Inc. have been charged with misrepresenting the company's books to increase
the amount of money they could borrow. The authorities allege that
co-founders Messrs. Sherman and Cummings misled the company's external
auditors and had poor internal controls. The deficiencies continued until
the company filed for bankruptcy in July 2009.
CLASSROOM APPLICATION: This article is good to use for coverage of
both internal controls and also misrepresentation. The case is a good
illustration of the implications of having weak internal controls that lead
to intentional or unintentional misstatements in the financial statements.
QUESTIONS:
1. (Introductory) What are the facts of the case in the article?
What agency was involved? Why was it involved in the case?
2. (Advanced) What were the inventory control problems detailed in
the article? Do those problems seem to be a result of negligence or
intentional actions? Why? What responsibilities do CEOs and CFOs have to
insure that financial records properly record the situation in the company?
3. (Advanced) What sanctions did Mr. Cummings agree to accept? Do
these seem appropriate sanctions for his actions?
4. (Advanced) The article states that Mr. Cummings did not admit or
deny wrongdoing. Why would the SEC not require an admission of wrongdoing?
Why did he agree to sanctions if the SEC did not prove he participated in
wrongdoing?
Reviewed By: Linda Christiansen, Indiana University Southeast
Top executives of Florida computer-equipment
company QSGI Inc. QSGI -42.50% have been charged with misrepresenting the
company's books to increase the amount of money they could borrow, the
Securities and Exchange Commission said Wednesday.
QSGI Inc.'s Co-Founder and former Chief Financial
Officer Edward L. Cummings has agreed to pay a $23,000 a penalty to settle
the charges, the agency said. Under the terms of the settlement, Mr.
Cummings, who didn't admit or deny wrongdoing, agreed to a five-year ban
from practicing as an accountant of any entity regulated by the SEC and from
serving as an officer or director of a publicly traded company, the agency
said.
The case against Co-Founder and Chief Executive
Marc Sherman is pending. Mr. Sherman is to file an answer within 20 days,
according to the SEC.
Attempts to reach Mr. Sherman and the company for
comment were unsuccessful.
The authorities charge Messrs. Sherman and Cummings
misled the company's external auditors, withholding, for example, that
inventory controls at the company's Minnesota operations were inadequate.
The authorities charge the West Palm Beach, Fla.,
company failed to design inventory-control procedures that took into account
such things as employees' qualifications and experience levels. Sales and
warehouse employees often failed to document the removal of items from
inventories and when they did, accounting personnel often failed to process
the paperwork and adjust inventory in the company's financial reporting
system, the SEC said.
The inventory control problems emerged at the
Minnesota facility beginning in 2007, when key personnel left, according to
the SEC. Workers assigned to replace the accounting staff, however, lacked
the necessary accounting background, the authorities said, adding, training
either didn't take place or was inadequate, the SEC says.
The deficiencies continued until the company filed
for bankruptcy in July 2009, the SEC added.
Also, the authorities alleged, Mr. Sherman directed
Mr. Cummings to accelerate the recognition of certain inventory and accounts
receivables by as much as a week at a time, improperly increasing revenue,
to maximize how much money the company could borrow from its chief creditor.
Jensen Comment
Rich Kinder was the President and Chief Operating Officer of Enron from
1990-1996. He resigned from Enron several years before the Enron scandals broke.
To my knowledge he was never implicated in those scandals.
A going away party given for him by his Enron colleagues in 1996 is quite
hilarious. Among other things it features Ken Lay, Jeff Skilling, and then Texas
Governor George W. Bush.
Watch the Video, especially the part where Jeff Skilling proposes Hypothetical
Future Value (HPV) accouinting ---
http://www.trinity.edu/rjensen/FraudEnron.htm#HFV
Be patient. This uncompressed video is very slow to load. Note that close
friends are playing the parts of key players in the video like Jeff Skilling and
Rich Kinder (played by a woman named Peggy in this home video). Governor Bush
plays his own part.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 22, 2014
SUMMARY: Kinder Morgan may be giving up the tax-advantaged
partnerships that it popularized, but the pipeline giant is unlikely to pay
more taxes itself soon. In fact, projected tax savings are a big part of
what is fueling the $44 billion deal to consolidate Kinder's four entities
into one. The Houston-based company says the deal will generate about $20
billion in income-tax savings for it in the next 14 years.
CLASSROOM APPLICATION: This article presents an additional angle of
the Kinder Morgan consolidation. It offers an interesting look at tax
planning/strategy in structuring a deal.
QUESTIONS:
1. (Introductory) What are the facts of the consolidation and tax
strategy discussed in the article?
2. (Advanced) Why is Kinder Morgan making this change? What is the
business purpose (other that tax implications)?
3. (Advanced) What tax benefits will Kinder Morgan derive from the
business changes it is making? Are these significant benefits, given the
size of the business?
4. (Advanced) How will Kinder Morgan record the consolidation
changes in its accounting records? What journal entries will make? How will
the financial statements change?
Reviewed By: Linda Christiansen, Indiana University Southeast
SUMMARY: Kinder Morgan Inc.'s $44 billion plan to consolidate its
pipeline companies was greeted with excitement by Wall Street, which expects
the new streamlined company to snap up other pipeline partnerships. But some
investors in Kinder Morgan's master limited partnerships may not be happy as
the consolidation could leave them with big, unexpected tax bills.
Houston-based Kinder Morgan it would swallow three affiliated companies, two
of which are organized as MLPs. Such partnerships have attracted investors
because they offer hefty distributions that qualify for deferred taxes.
CLASSROOM APPLICATION: This article is useful for use when covering
partnership accounting and deferred taxes. It is also interesting to show
how a change in the form of business can result in a tax bill.
QUESTIONS:
1. (Introductory) What are the facts of the Kinder Morgan situation
discussed in the article? What is Kinder Morgan planning?
2. (Advanced) What is the tax impact of the changes planned by
Kinder Morgan? Who will be affected? Did those parties anticipate these
changes might happen? Have they planned for it?
3. (Advanced) Why is Kinder Morgan making this change? What is the
business purpose? Has the company acknowledge the tax impact of these
changes? Is the benefit of the changes on business worth the tax impact on
investors?
4. (Advanced) What were the plans of some investors' when they
purchased investments in Kinder Morgan? What long-term plans did some
investors have? What tax advantages were they planning to use?
5. (Advanced) How will Kinder Morgan record these changes in its
accounting records? What journal entries will make? How will the financial
statements change?
Reviewed By: Linda Christiansen, Indiana University Southeast
Kinder Morgan Inc. KMI -1.01% 's $44 billion plan
to consolidate its pipeline companies was greeted with excitement by Wall
Street, which expects the new streamlined company to snap up other pipeline
partnerships.
But some investors in Kinder Morgan's master
limited partnerships may not be happy as the consolidation could leave them
with big, unexpected tax bills, tax experts said.
Houston-based Kinder Morgan said Sunday it would
swallow three affiliated companies, two of which are organized as MLPs. Such
partnerships have attracted investors because they offer hefty distributions
that qualify for deferred taxes.
Richard Kinder, the company's founder and chief
executive, said on Monday that energy MLPs are a "fertile field to do a
little grazing in." Once a sleepy corner of energy-infrastructure investing,
the number of MLPs has grown rapidly, from just 38 a decade ago to 120 today
with a combined market value of around $560 billion.
Mr. Kinder said in a call with investors that the
deal for investors in publicly traded MLPs Kinder Morgan Energy Partners KMP
-1.19% LP and El Paso Pipeline Partners EPB -1.24% LP was a "tremendously
valuable transaction" because dividend growth at the surviving company would
be faster than the payouts at those MLPs.
Investors had been concerned about how Kinder could
continue to increase the payouts from its partnerships. With a market value
of over $40 billion, Kinder Morgan Energy Partners would have needed large,
high-return projects to make meaningful increases to its revenue.
Pressure to increase their distributions is likely
to lead other MLPs into mergers or other deals, said Jason Spann, a Deloitte
Tax LLP partner who advises on mergers and acquisitions.
"It looks like the stock market is treating this
well, so I expect to see some copycats," he said. MLPs also might convert to
regular corporations as rising interest rates make the partnerships less
attractive as investments, as occurred in the 1980s, he said.
Shares of Kinder Morgan Energy Partners and El Paso
Pipeline Partners, rose 17% and 21%, respectively, on Monday, while Kinder
Morgan Inc.'s stock advanced 9%. Shares of Kinder Morgan Management KMR
-1.49% LLC, which isn't an MLP, rose 24%. Under the proposed deal, owners of
the three Kinder-related companies would receive cash and shares in Kinder
Morgan Inc.
Kinder Morgan Energy Partners also was paying about
half its cash-flow to its manager, Kinder Morgan Inc. Analysts said that
made it hard for the MLP to invest in the pipelines and other projects
needed to service the country's new oil and gas fields. "You've got to be
structured financially to be a faster-growing company," said UBS analyst
Shneur Gershuni.
Expectations that the deal would require Kinder
Morgan investors to move cash to other MLPs helped lift prices overall for
such partnerships, said Greg Reid, a managing director at Salient Partners
LP, a Houston-based asset manager with $4.3 billion in MLPs under
management.
Energy companies created MLPs as a way to raise
money and issue debt backed by pipelines and other assets. But Moody's
Investors Service warned in a recent research report that such partnerships
provide "less protection to investors than that of a typical public
company." MLPs typically don't have annual meetings to elect directors or
have independent directors who oversee strategy.
Several tax advisers said individual investors in
Kinder's MLPs could face unwelcome tax bills.
Because Kinder Morgan Energy Partners is organized
as a partnership that benefits from substantial deductions, the taxes on its
substantial quarterly payouts were deferred.
When the units are sold or exchanged—as they will
be in the reorganization—the deferred taxes come due.
"In this deal, one group of stakeholders will owe
tax so that the company as a whole can benefit," said Robert Willens, an
independent tax expert in New York.
Most of that income will probably be taxed at
ordinary rates, which are higher than long-term capital-gain rates, said
Robert Gordon, a tax strategist who heads Twenty-First Securities Corp. in
New York.
The tax could be especially unwelcome for investors
who planned to hold the units until death, when they could skip paying the
deferred taxes. In effect, Mr. Gordon said, these people will owe tax they
wouldn't otherwise have had to pay. The individual impact would vary widely,
depending on when the units were bought and other factors, he said.
SUMMARY: Cloud computing can yield significant benefits, from
increasing speed to market and achieving better economies of scale to
improving organizational flexibility and trimming spending on technology
infrastructure and software licensing. As organizations increasingly migrate
to cloud computing, however, they could be putting their data at significant
risk. Positioning the internal audit (IA) function at the forefront of cloud
implementation and engaging IA in discussions with the business and IT early
on can help address potential risks.
CLASSROOM APPLICATION: This article offers an example how the
internal audit function of a business operates, in this case specifically
with cloud computing.
QUESTIONS:
1. (Introductory) What is the internal audit (IA) function of a
business? Why would a business use IA?
2. (Advanced) What is cloud computing? What is it value to a
business? What new issues might it bring to the business?
3. (Advanced) What value can the IA function bring to an
organization's adoption of cloud computing? What problems could occur if the
organization does not engage internal auditors in the process?
4. (Advanced) What are the various stages of the process in which
IA can help? In which stage do you see the greatest value added by IA? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Cloud computing can yield significant benefits,
from increasing speed to market and achieving better economies of scale to
improving organizational flexibility and trimming spending on technology
infrastructure and software licensing. As organizations increasingly migrate
to cloud computing, however, they could be putting their data at significant
risk. Those risks include reduced levels of control as information
technology (IT) departments are bypassed, as some business owners opt to
obtain services more quickly and cheaply by creating their own “rogue”
technology environments via the cloud.
Positioning the internal audit (IA) function at the
forefront of cloud implementation and engaging IA in discussions with the
business and IT early on can help address potential risks. “Internal
auditors view the business through a risk lens,” says Michael Juergens, a
principal at Deloitte & Touche LLP. “With their deep understanding of risk
mitigation, internal auditors can work with the business and the IT function
to build a framework for assessing and mitigating the risks associated with
cloud computing.”
Broadly defined, cloud computing is a model for
enabling ubiquitous on-demand network access to a shared pool of
configurable computing resources and services, which can be rapidly
provisioned and released with minimal management effort or service provider
interaction. The IA function can provide assurance on the effectiveness of
risk mitigation efforts tied to cloud utilization, explains Mr. Juergens.
“Before entering into agreements with cloud vendors or potential customers,
a thorough assessment of the current vendor procurement process should be
conducted by IA to determine how to mitigate cloud risks the company may be
taking on,” he says. “And while an organization’s information security group
can build cloud monitoring capabilities, IA can assist and assess the
effectiveness of the control environment and prevent the IT department being
left out of the loop.”
A Steady Migration to the Cloud
Companies are migrating to the cloud in such
numbers because of significant advantages it can provide. Once the migration
to cloud functionality is complete, organizations no longer face the task of
creating and maintaining large data centers and developing proprietary
complex systems. The expense of software upgrades or application patches is
carried by the provider, which can allocate these costs across a wide
customer base. Freed from large up-front capital investments, time-consuming
installation and hefty maintenance costs, IT departments can focus on
value-added activities that promote the business. While not every
organization today has fully embraced cloud computing, chances are cloud
services will be the norm within the next decade.
The growing consumer use of social media and mobile
technologies has also added to the demand for cloud services, as businesses
seek better and faster ways to reach out to existing and potential
customers. Some companies go beyond using the cloud to provide customer
services. For instance, in an effort to focus its IT operations on business
services, an online video rental and streaming company moved its internal
applications to a cloud service provider and began using software as a
service (SaaS) applications. Even governments are getting in on the game: A
large metropolitan city equipped all its employees with an application for
both email and cloud-based collaboration.
The shift to cloud computing has essentially
extended the boundaries of the traditional computer processing environment
to include multiple service providers,” says Khalid Wasti, a director at
Deloitte & Touche LLP. “This brings a complex set of risks to an
organization’s data as it travels through the cloud.” When a company opts
for the speed and convenience of moving to the cloud, it must often
relinquish control not only of its own data, but that of its customers.
Confidentiality, security and service continuity become critical
considerations—as does regulatory compliance, which remains the
responsibility of the business,” Mr. Wasti adds.
How IA Can Help Assess Risks
As an initial step, an organization should work
with IA to create a Cloud Risk Framework Tool. “The tool can help the
organization get to the heart of risks by providing a view on the pervasive,
evolving and interconnected nature of risks associated with cloud
computing,” adds Mr. Wasti. These include governance, risk management and
compliance; delivery strategy and architecture; infrastructure security;
identity and access management; data management; business resiliency and
availability; and IT operations. Such a tool can also improve efficiency in
compliance and risk management efforts and be used to develop risk event
scenarios that require integrated responses.
To be more effective, the tool should be customized
to include regulatory, geographic, industry and other specific issues that
impact the organization. As IA modifies its organizational risk framework
and guides the risk conversation with IT and the business, the following
issues pertaining to infrastructure security, identity and access management
and data management should be taken into account.
1. Infrastructure Security—Companies
should verify that cloud providers have acceptable procedures in areas such
as key generation, exchange, storage and safeguarding, as flawed security
could result in the exposure of infrastructure or data.
Are there security vulnerabilities that might
have been introduced by other customers sharing the same environment?
Are security patches performed in a timely manner?
What is the risk that a denial-of-service
attack will occur, and how will the organization respond?
What security practices should be introduced
as part of the move to the cloud? Do conflicting customer priorities
have the potential to compromise cloud service security?
If the organization is unable to independently
test security, what are the implications?
Has the vendor developed an encryption and
key-management process?
Who should manage the keys?
2. Identity and Access Management—Organizations
should consider how their authorization and access models will integrate
with new cloud services and assess whether they are using appropriate
identity and authorization schemes.
Can internal and cloud-based identity
management components be securely integrated?
Has the organization conducted adequate due
diligence prior to assigning cloud management privileges?
Are there proper access controls for cloud
management interfaces?
Has the cloud provider implemented segregation
of duties for its staff?
3. Data Management—Because
organizations may have to relinquish control over their data to cloud
providers, it is crucial that they fully understand how data will be handled
in the cloud environment.
Will the complexity of multiple cloud data
stores compromise data retention?
What is the risk of unauthorized access to or
inappropriate use of sensitive data, and how will this be handled? How
will the cloud vendor notify the organization of a violation?
Will transfer of data between jurisdictions
violate any data privacy laws?
Will the organization be able to remove data
from multiple cloud data stores?
Moving Forward
Implementing a cloud strategy changes the risk
landscape in profound ways. As some risks are minimized, others spring up in
their place. “Recognizing and responding to this shifting organizational
risk profile is IA’s purview,” says Charlie Willis, a senior manager at
Deloitte & Touche LLP. “Because internal auditors understand the interplay
between business processes and risk, they can help business leaders to
articulate their appetite for risk and help develop strategies for
mitigating it,” he adds. As the organization adopts technology initiatives
that involve cloud computing, IA should consider taking proactive steps to:
Engage stakeholders—Encourage
IT and business executives to have an informed conversation about the
move to the cloud. Help stakeholders understand the potential for rogue
IT environments. Explore which applications and data are candidates for
transfer to a cloud environment and be prepared to discuss the risk
implications of the move.
Review the organizational risk
framework—Revise the company’s risk framework, minimizing risks
that are no longer a concern. This framework tool should measure the
organization’s cloud capability state across the different cloud risk
domains.
Evaluate potential cloud vendors—IT
will be most familiar with the range of vendors, and the business
leaders will be able to articulate the objectives of a move to the
cloud. But IA should also be engaged in risk discussions, along with the
organization’s security, risk and compliance groups, and help the
organization develop an assessment profile for vendors.
The next time you’re presiding over an intense philosophical
debate, feel free to use these hand signals to referee
things. Devised by philosophy prof
Landon Schurtz, these hand signals were jokingly meant
to be used at APA (American
Philosophy Association) conferences. Personally, I think
they would have made a great addition to the famous
Monty Python soccer match where the Germans (Kant,
Nietzsche & Marx) played the indomitable Ancient Greeks
(Aristotle, Plato & Archimedes). Imagine Confucius, the
referee, whirling his hand in a circle and penalizing
Wittgenstein for making a circular argument. Priceless.
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
Question
If you presented the following article in class how would you approach the
analysis of this article and/or evaluate student reactions to this article?
Considerations
First consider the fact that neither the FASB nor the IASB has a working
definition of net earnings, and it's quite dangerous to compare earnings numbers
of a company over time.
Second consider the classical debate over whether accrual financial
statements or cash flow financial statements are more important when analyzing
the future of a company --- realizing that both may be important at the same
time.
Third consider any problems of revenue recognition and unrealized fair value
changes that may or may not be factors in these particular Twitter financial
statements.
"Why This Twitter Earnings Report Matters So Much," by Jon C. Ogg,
24/7 Wall Street, July 28, 2014 ---
Click Here
Twitter, Inc. (NYSE: TWTR) is set to report its
second quarter earnings report after the close of trading on Tuesday. This
will be just the second full quarter earnings report since its late 2013
initial public offering.
24/7 Wall St. has seen that the Thomson Reuters
estimate is for a loss of one-cent per share on revenues of $283 million.
Management had guided in a range of $270 to $180 million. New advertising is
said to be continuing to let the company grow, but we are also looking at
that user growth closely and the internal ad metrics rather than just the
raw revenue number.
We would caution that 2013 revenue was $664.89
million, up almost 110% from the $316.93 million in 2012. Revenue growth is
expected to slow ahead – with 90% growth to $1.27 billion in 2014 and with
revenue growth of another 62% to $2.06 billion in 2015. This is still
massive growth expected, but many
investors
remain mixed to uncertain about Twitter and its
endless growth.
On top of revenue growth, we will again be looking
closely at user growth. This should be up somewhere close to around 6% again
to around 270 million users, although the fair range might be 265 million to
275 million.
The number is too wild to calculate for an
earnings multiple for 2014, but even
after losing half of its post-IPO peak value Twitter still trades above
140-times expected 2015 earnings per share. It is also trading at a multiple
of almost 11-times expected 2015 revenues.
We have long wondered how investors will continue
to treat social media stocks in the years ahead. At some point there will
either be a split where social media takes over or there will be user
fatigue. That verdict remains out.
Twitter shares were above $38 on Monday in
afternoon trading. Its 52-week
trading
range
is $29.51 to $74.73, and the consensus analyst price target is almost
$43.50.
It almost feels like a conundrum for Twitter
investors. The stock has lost half of its peak value, but it likely still
has to post very strong numbers to keep investors happy. Having a
market
cap of $22.25 billion in revenues
comes with high expectations, and disappointing on those expectations could
come with serious consequences.
These were the metrics posted in the first quarter
of 2014, verbatim from Twitter’s release:
Average Monthly Active Users (MAUs)
were 255 million as of March 31, 2014, an increase of 25%
year-over-year.
Mobile MAUs reached
198 million in the first quarter of 2014, an increase of 31%
year-over-year, representing 78% of total MAUs.
Timeline views reached 157 billion for
the first quarter of 2014, an increase of 15% year-over-year.
Advertising revenue per thousand
timeline views reached $1.44 in the first quarter of 2014, an increase
of 96% year-over-year.
What Cuban failed to mention is that net earnings and EBITDA cannot be
defined since the FASB elected to give the balance sheet priority over the
income statement in financial reporting --- "The Asset-Liability Approach: Primacy does not mean Priority,"
by Robert Bloomfield, FASRI Financial Accounting Standards Research
Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
The International Accounting Standards
Board (IASB) on Thursday issued a new financial instruments standard that
introduces an expected-loss impairment model. But the standard falls short
of the goal of convergence with financial instruments guidance being
developed by FASB.
IFRS 9, Financial Instruments, is
the final element of the IASB’s response to the global financial crisis.
The IASB and FASB worked for years to meet
international calls for a converged financial instruments standard, but
their efforts proved unsuccessful in part because they were unable to agree
on a model for impairment.
The standard, which takes effect for
annual periods beginning on or after Jan. 1, 2018, includes:
A model for the classification and
measurement of financial instruments.
The new impairment model.
A substantially reformed model for
hedge accounting.
Changes removing the volatility in
profit or loss that was caused by changes in the credit risk of
liabilities elected to be measured at fair value.
“The reforms introduced by IFRS 9 are much-needed improvements to the
reporting of financial instruments and are consistent with the requests from
the G-20, the Financial Stability Board, and others for a forward-looking
approach to loan-loss provisioning,” IASB Chairman Hans Hoogervorst said in
a news release. “The new standard will enhance investor confidence in banks’
balance sheets and the financial system as a whole.”
Convergence not achieved
The lack of convergence with the standard
FASB is developing, though, falls short of the goals of some in the
international community. FASB’s standard is expected to be published late
this year.
In a December 2012
letter to FASB and the IASB,
the Basel Committee on Banking Supervision expressed concern that the boards
may not reach convergence and reiterated the committee’s strong support for
a converged standard. In July 2013, the Basel Committee
urged the boards to
reconvene to reach a converged solution.
The Financial Stability Board also
restated its support for a converged standard in a
September 2013 report.
“It continues to be very important to have
a globally applied standard on accounting for loan loss provisions, which
recognises losses on portfolios earlier and more consistently,” the report
stated.
Although the IASB and FASB agreed
that their standards needed to reflect expected-loss rather than
incurred-loss principles, they developed different models for recognizing
those expected losses. An
IASB summary of the
financial instruments project states that the international board worked
closely with FASB throughout the development of IFRS 9. The summary states
that although every effort was made to reach a converged solution, those
efforts were unsuccessful.
The AICPA Financial Reporting
Executive Committee
also wrote to FASB in
May 2013 strongly supporting convergence but said convergence should not be
more important than a high-quality accounting standard.
IASB’s new approach
The standard published by the IASB
provides an approach for the classification of financial assets that is
driven by cash flow characteristics and the business model in which an asset
is held. This single, principles-based approach replaces existing,
rules-based requirements that, according to the IASB, are considered complex
and difficult to apply. The new model also aims to remove complexity by
applying a single impairment model to all financial instruments.
The new expected-loss impairment model is
designed to require more timely recognition of expected credit losses,
addressing concerns about delayed recognition of credit losses on loans that
arose during the financial crisis. Entities will be required to account for
expected credit losses from the time that financial instruments are first
recognized and to recognize full lifetime expected losses on a more timely
basis, according to the IASB.
A transition resource group the IASB plans
to form will support stakeholders in the transition to the new impairment
requirements.
The IASB’s substantially reformed model
for hedge accounting will enhance disclosures about risk management
activity. The hedge accounting changes are designed to align the accounting
treatment with risk management activities, enabling these activities to be
better reflected in financial statements. The changes are designed to give
financial statement users more information about risk management and the
effect of hedge accounting on financial statements.
In addition, IFRS 9 will bring about
changes in an entity’s own credit risk reflected in profit or loss. An
entity will no longer recognize in profit or loss gains caused by the
deterioration of an entity’s own credit risk that are elected to be measured
at fair value.
Early application of this change, before
any other changes in the accounting for financial instruments, is permitted
by IFRS 9.
And all that while you own land as an investment you must pay those
confounded property taxes even if there is no annual cash coming in from the
land.
"Land Is A Wildly Risky Investment," by Sean Fergus, Business Insider,
July 29, 2014 ---
http://www.businessinsider.com/land-is-the-riskiest-investment-2014-7
Jensen Comment: How Property Taxes Can Ruin Land Investment
Mr. SSSSS from Chicago (who also has a Loon Mountain ski chalet about 30 miles
from our cottage) in 1993 invested $200,000 in a 24-acres across the road from
where we bought our retirement cottage. Most of his 24 acres are deemed lower wet
lands protected from development by law. However, there is an upper ridge house
lot with the best mountain views in New Hampshire. Shortly thereafter our
Village of Sugar Hill re-appraised all of its properties and assigned nearly
$600,000 tax value to this lot. On average Mr. SSSSS then paid $12,000 per per
year for 20 years while trying to sell this lot. He never had an offer because
he set such a high price --- plus nobody wanted to pay taxes of $1,000 per month
on just the bare scenic lot.
New Hampshire is somewhat unique in the USA because it has a relatively high
view tax that is factored into the property taxes.
In 2006 before the real estate bubble burst Seller SSSSS was asking $1.4
million for the lot for which the property taxes on just the lot would be
increased to well over $20,000 per year on just the bare lot. After the
bubble burst Seller SSSSS reduced the asking price to $400,000 in 2009. Still
nobody wanted to pay those taxes at most any price on the lot.
Then a naive investor, Buyer BBBBB, in autumn of 2013 made a $300,000 offer
that was accepted. I say "naive" because Buyer BBBBB assumed the tax appraisal
would be reduced to his purchase price $300,000. Sugar Hill does not lower tax
appraisal values such that Buyer BBBBB was shocked that he would have to pay
$12,000 per year property taxes while trying to sell his investment. He has no
intention of building a home on this lot with such high property taxes.
Mr. and Mrs. BBBBB stopped by the other day while I was on my tractor mowing.
They are considering selling the 24 acres at a huge loss to the Ammonoosuc
Conservation Trust that would eliminate the property taxes on the entire 24
acres. Sugar Hill would most likely agree to this since the ridge is a popular
site with a mounted telescope where tourists visit each year winter and summer
to look out over three mountain ranges.
This is the mounted telescope on the lot
My point is that for both Seller SSSSS and Buyer
BBBBB their investment dreams for this 24 acres were largely shattered by
property taxes that seemingly cannot be reduced if sold at any price to another
investor or to a buyer who wants to build a home and pay the high property taxes
on the lot.
The Ammonoosuc Conservation Trust, on the other hand, owns various tax-free
scenic parcels in this area. It also has deed restrictions on the 68-acre golf
course behind our cottage. This means that the property may never be anything
but a public golf course or an undeveloped forest in perpetuity.
Land indeed is usually a risky investment.
If investment land, like a farm, has annual cash flows that cover the property
taxes each year then the purchase price is adjusted upward. Rich folks like Ted
Turner diversify their land investments all over the world to deal with
financial risks of individual parcels. Being rich they can also cover the annual
property taxes. But average folks like me that cannot diversify their land
investments to such an extent take on huge risks when buying a single parcel.
There are two big arguments for land investment. First it is a pretty good
long-term inflation hedge. Second it can often be leveraged with a small cash
down payment and a huge mortgage for buyers who want to take on the added risk
of financial leverage. This generally is not a good idea for financial
amateurs who are not "insiders" in real estate markets..
An investment in your home is a somewhat different matter since your
enjoyment or hatred of the years living in that home
make home ownership much more than an economic proposition. But it
can be a real sweat trying to sell your home in most, not all, current real estate
markets. I've been lucky selling the five homes I've sold in my lifetime thus
far, but I
would certainly lose money on my present home if I had to sell in the present
real estate market in these economically-depressed White Mountains. Throughout
northern New England we have abandoned homes with no buyer prospects in
nearly-dead lumber and paper mill towns.
However, my plan is to die in our wonderful cottage so the profit or loss on
the ultimate sale really no longer matters to me. Erika and I love our
retirement home, pay our very high view tax twice each year, and do not give any
thought to resale value ---
http://www.trinity.edu/rjensen/NHcottage/NHcottage.htm
Getting older in retirement eliminates a lot of worries and financial stress in
our former lives. I have a four-year supply of heating oil to hedge against the
ups and downs of oil prices.
And I really don't mind paying property taxes since these fund our free
public schools, provide comfort to people less fortunate than me, provide my
fire and police protection, and fund the plowing of the road out front 14 times
a day in snow season.
Jensen Comment
I hope Tony Catanach is maybe back into blogging at the Grumpy Old Accountants
Blog site
Years ago this was a blog maintained by Penn State's Ed Ketz --- the original
Grumpy Old Accountant
Then Ed was joined by Villanova's Anthony Catanach
Then several years ago Ed dropped out for reasons that were never fully
explained (I'm guessing it might be a health reason)
Then after February 2014 no new postings appeared on the site until the new
posting on July 10, 2014 by Tony
I've always liked the Grumpy Old Accountants blog because it is in the style
of the old Barron's critical commentaries of particular financial statements by
Abe Briloff (who was finally admitted to the Accounting Hall of Fame in
2014). These days its hard to find an accounting academic who pours over a given
company's accounting and auditing reports and raises questions about conformance
with GAAP and GAAS at at technical level. Ed did this when he commenced the
Grumpy Old Accountant's blog and it appears that Tony will carry on with that
fine tradition.
I thought bunnies
were supposed to be cute and cuddly little creatures? Well after
looking at Annie’s, Inc….maybe not. This Company has recently “hit
the trifecta:” a restatement of its financials (2014 10K, p. 54), a
material weakness report on its controls over financial reporting
(2014 10K, pp. 45 and 74), and an auditor resignation (2014 8K dated
June 1)…all in the space of a week. And if this weren’t bad enough,
along comes a class action suit alleging false and/or misleading
financial statements and disclosures.
But should we
really be surprised. No, not really since until this year the
Company avoided scrutiny of its accounting and controls via its
JOBS Act status as an “emerging growth
company”(2014 10K, p. 32). It has been less than a year since I
reminded you in
Garbage In, Garbage Out – Are Accountants Really to Blame? that:
“Proponents of “emerging-growth” company (EGC)
internal control reporting exemptions claim cost savings that
promote business development. The reality is that most ECGs
simply have no internal controls.”
So, did
PricewaterhouseCoopers (PwC) really dump Bernie, Annie’s mascot,
just over a restatement and some internal control weaknesses? After
all, there’s many a PwC client that has committed far greater sins
and still remained a client of the firm (hint: Financial Crisis of
2007 and 2008). Just how could PwC disapprove of
Bernie, Annie’s “Rabbit of Approval?”
This is just the kind of question this grumpy old accountant likes
to tackle.
Management Under Fire
Given recent
allegations made in the class action suit filed in United States
District Court, Northern District of California, and docketed under
3:14-cv-03001, it seems reasonable to first investigate whether
Annie’s management had any incentives to engage in inappropriate
financial reporting behaviors.
Clearly,
management experienced significant pressures to report positive
performance results. The following factors individually and
collectively may have created demands to engage in aggressive
financial reporting:
The Company’s
history of operating losses as evidenced by its retained earnings
deficit (2014 10K, p. 47)
The recent
rapid growth in profitability despite declining gross profit
percentages (2014 10K, p. 34)
Restrictions
imposed by credit agreements (2014 10K, p. 22)
The
steady decline in the Company’s stock
price per share from a high of $51.36 on November 15, 2013 to
its current price of 33.14 (a decline of over 35 percent)
The role of
stock based rewards in management compensation (2014 10K, pp.
63-65)
And all of these
hurdles had to be addressed in a highly competitive market (2014
10K, pp. 9 and 12).
Could the
Company’s operating environment contribute to or facilitate
inappropriate financial reporting by management? The recent
negative report on internal controls over financial reporting would
seem to suggest so. Acknowledging “an insufficient complement of
finance and accounting resources” (2014 10K, p. 74) is a fairly
damning admission for any organization, much less a publicly-traded
company. The statement suggests an environment devoid of controls
and oversight…one just perfect for aggressive financial reporting.
And contrary to managements’ assertions, there is no quick fix to
this problem.
Then, there is
the issue of key officer turnover at Annie’s. Amanda K. Martinez
joined the Company as Executive Vice President in January 2013 (2013
8K dated January 5), was promoted in December 2013 (2013 8K dated
December 9), and resigned without a stated reason in March 2014 just
prior to the end of the fiscal year (2014 8K dated March 26). Also,
the Company’s previous chief financial officer, Kelly J. Kennedy,
resigned effective November 12, 2013 and was succeeded by Zahir
Ibrahim on the following day (2013 8K dated October 16). Such
changes in the C-suite can wreak havoc on internal controls, and
potentially negatively affect financial reporting.
So, is there any quantitative support for my
qualitative concerns about the quality of Annie’s financial
reporting? Absolutely! Let’s first see what the
Beneish Model reveals about the likelihood
of earnings manipulation by the Company’s management.
Go to either of the above sites and do a word search on the phrase "Grumpy
Old." Most the hits will be older blogs that cannot be accessed easily from Tony's
new site since he commenced a new blog after Ed dropped out.
I provide generous quotations of Ed's old blog modules.
"The power of the unaided mind is highly
overrated… The real powers come from devising external aids that enhance
cognitive abilities. " —Donald Norman
Algorithms are a fascinating use case for
visualization. To visualize an algorithm, we don’t merely fit data to a
chart; there is no primary dataset. Instead there are logical rules that
describe behavior. This may be why algorithm visualizations are so unusual,
as designers experiment with novel forms to better communicate. This is
reason enough to study them.
But algorithms are also a reminder that
visualization is more than a tool for finding patterns in data.
Visualization leverages the human visual system to augment human intellect:
we can use it to better understand these important abstract processes, and
perhaps other things, too.
Continued in the article (You
really have to study the visuals to appreciate this article)
Harvard University and the Massachusetts Institute
of Technology have released a set of open-source visualization tools for
working with a rich trove of data from more than a million people registered
for 17 of the two institutions’ massive open online courses, which are
offered through their edX platform.
The tools let users see and work with “near
real-time” information about course registrants—minus personally identifying
details—from 193 countries. A Harvard news release says the tools “showcase
the potential promise” of data generated by MOOCs. The aggregated data sets
that the tools use can be also downloaded.
The suite of tools, named Insights, was created by Sergiy
Nesterko, a research fellow in HarvardX, the university’s
instructional-technology office, and Daniel Seaton, a postdoctoral research
fellow at MIT’s Office of Digital Learning. Mr. Nesterko said the tools “can
help to guide instruction while courses are running and deepen our
understanding of the impact of courses after they are complete.”
The Harvard tools are
here, while those for MIT are
here.
Jensen Comment
Wharton's Financial Accounting course is in the Top 12
Also note that those that argue you can't teach public speaking online are
apparently wrong, although I don't see why they are wrong.
The moving forces behind MOOCs have been MIT, Harvard, and Stanford.
MIT and Harvard have the most MOOC offerings, but none of them made the Top 12.
However, the rankings below are considered "professional" courses, and the
graduate business schools at MIT, Harvard, and Stanford are not, to my
knowledge, serving up MOOC courses. The Wharton School at Penn, however, is
serving up the core courses in the first year of Wharton's two-year MBA program.
Two of those courses are in the Top 12 below.
Reasons for taking MOOCs are many and varied. I think many students who
enroll for the free Wharton core business courses are preparing to do better in
their forthcoming MBA programs wherever those are to be taken around the globe.
Most students probably take free MOOCs in general out of curiosity of how
popular courses at prestigious universities are taught. Some professors take
MOOCs just to see how the content of courses is handled by a well-known teacher.
There are for-credit distance education
courses available from most major universities these days. These, however, are
not free due, in part, to the costs of assigning grades for credit. Bob Jensen's
threads on fee-based distance education training and education alternatives ---
http://www.trinity.edu/rjensen/CrossBorder.htm
US News has tried for years to rank for-profit universities, but they
don't seem to want to provide the data.
DID AMAZON JUST CHANGE THE LIBRARY WORLD (including the textbook world)?
Unlimited Kindle Books is a Game Changer (if they can license everything) The Ubiquotous Librarian
July 18, 2014, 8:51 pm
By Brian Mathews
Amazon just announced an All-You-Can-Read service:
Unlimited Kindle. It offers a collection of over 600,000 eBook titles
for a low price of $9.99 per month. If this truly includes
all Kindle books—it is a game
changer.
Continued in article
Jensen Comment
This may well change the world eventually for over a million newer books, but it
is not quite the game changer for millions of older books as Google Books ---
http://books.google.com/
But whereas the cost of a solar panel is easy to
calculate, the cost of electricity is harder to assess. It depends not only
on the fuel used, but also on the cost of capital (power plants take years
to build and last for decades), how much of the time a plant operates, and
whether it generates power at times of peak demand.
To take account
of all this, economists use "levelised costs"--the net present value of all
costs (capital and operating) of a generating unit over its life cycle,
divided by the number of megawatt-hours of electricity it is expected to
supply.
The trouble, as Paul Joskow of the Massachusetts
Institute of Technology has pointed out, is that levelised costs do not take
account of the costs of intermittency. Wind power is not generated on a calm
day, nor solar power at night, so conventional power plants must be kept on
standby--but are not included in the levelised cost of renewables.
Electricity demand also varies during the day in
ways that the supply from wind and solar generation may not match, so even
if renewable forms of energy have the same levelised cost as conventional
ones, the value of the power they produce may be lower. In short, levelised
costs are poor at comparing different forms of power generation.
To get around that problem Charles Frank of the
Brookings Institution, a think-tank, uses a cost-benefit analysis to rank
various forms of energy. The costs include those of building and running
power plants, and those associated with particular technologies, such as
balancing the electricity system when wind or solar plants go offline or
disposing of spent nuclear-fuel rods.
The benefits of renewable energy include the value
of the fuel that would have been used if coal- or gas-fired plants had
produced the same amount of electricity and the amount of carbon-dioxide
emissions that they avoid.
Mr Frank took four sorts of zero-carbon energy
(solar, wind, hydroelectric and nuclear), plus a low-carbon sort (an
especially efficient type of gas-burning plant), and compared them with
various sorts of conventional power. Obviously, low- and no-carbon power
plants do not avoid emissions when they are not working, though they do
incur some costs.
So nuclear-power plants, which run at about 90% of
capacity, avoid almost four times as much CO{-2} per unit of capacity as do
wind turbines, which run at about 25%; they avoid six times as much as solar
arrays do. If you assume a carbon price of $50 a tonne--way over most actual
prices--nuclear energy avoids over $400,000-worth of carbon emissions per
megawatt (MW) of capacity, compared with only $69,500 for solar and $107,000
for wind.
Nuclear power plants, however, are vastly
expensive. A new plant at Hinkley Point, in south-west England, for example,
is likely to cost at least $27 billion. They are also uninsurable
commercially. Yet the fact that they run around the clock makes them only
75% more expensive to build and run per MW of capacity than a solar-power
plant, Mr Frank reckons.
To determine the overall cost or benefit, though,
the cost of the fossil-fuel plants that have to be kept hanging around for
the times when solar and wind plants stand idle must also be factored in. Mr
Frank calls these "avoided capacity costs"--costs that would not have been
incurred had the green-energy plants not been built.
Thus a 1MW wind farm running at about 25% of
capacity can replace only about 0.23MW of a coal plant running at 90% of
capacity. Solar farms run at only about 15% of capacity, so they can replace
even less. Seven solar plants or four wind farms would thus be needed to
produce the same amount of electricity over time as a similar-sized
coal-fired plant. And all that extra solar and wind capacity is expensive.
A levelised playing field
If all the costs and benefits are totted up using
Mr Frank's calculation, solar power is by far the most expensive way of
reducing carbon emissions. It costs $189,000 to replace 1MW per year of
power from coal. Wind is the next most expensive. Hydropower provides a
modest net benefit.
But the most cost-effective zero-emission
technology is nuclear power. The pattern is similar if 1MW of gas-fired
capacity is displaced instead of coal. And all this assumes a carbon price
of $50 a tonne. Using actual carbon prices (below $10 in Europe) makes solar
and wind look even worse. The carbon price would have to rise to $185 a
tonne before solar power shows a net benefit.
There are, of course, all sorts of reasons to
choose one form of energy over another, including emissions of pollutants
other than CO{-2} and fear of nuclear accidents. Mr Frank does not look at
these. Still, his findings have profound policy implications. At the moment,
most rich countries and China subsidise solar and wind power to help stem
climate change.
Yet this is the most expensive way of reducing
greenhouse-gas emissions. Meanwhile Germany and Japan, among others, are
mothballing nuclear plants, which (in terms of carbon abatement) are
cheaper. The implication of Mr Frank's research is clear: governments should
target emissions reductions from any source rather than focus on boosting
certain kinds of renewable energy.
Jensen Comment
Since accountics research is rarely replicated and or even commented upon in
accounting research journals, detection of data fabrication is a rare event. It
was therefore a total shock to the academic accounting research world when the
Hunton and Gold paper was retracted by The Accounting Review in 2012. To
my knowledge this was only the second instance of a paper retraction by TAR
since it started publishing in 1926.
At the time the only explanation is that the retracted Hunton and Gold paper
had a "misstatement." Until now, there were no details given about the nature of
this "misstatement."
James E. Hunton, a prominent accounting professor
at Bentley University, has resigned amid an investigation of the retraction
of an article of which he was the co-author, The Boston Globe reported. A
spokeswoman cited "family and health reasons" for the departure, but it
follows the retraction of an article he co-wrote in the journal Accounting
Review. The university is investigating the circumstances that led to the
journal's decision to retract the piece.
Retraction: A Field Experiment Comparing the
Outcomes of Three Fraud Brainstorming Procedures: Nominal Group, Round
Robin, and Open Discussion
James E. Hunton, Anna Gold Bentley University and
Erasmus University Erasmus University This article was originally published
in 2010 in The Accounting Review 85 (3) 911–935; DOI:
10/2308/accr.2010.85.3.911.
The authors confirmed a misstatement in the article
and were unable to provide supporting information requested by the editor
and publisher. Accordingly, the article has been retracted.
REPORT OF JUDITH A. MALONE, BENTLEY UNIVERSITY ETHICS OFFICER,
CONCERNING DR. JAMES E. HUNTON
July 21, 2014
Pursuant to the Bentley University Ethics Complaint
Procedures (“Ethics Policy”), this report summarizes the results of an
eighteen - month investigation into two separate allegations of research
misconduct that were received by Bentley in November 2012 and January 2013
against James E. Hunton, a former Professor of Accountancy. The complainants
– one a confidential reporter (as defined in the Ethics Policy) and the
other a publisher – alleged that Dr. Hunton engaged in research misconduct
in connection wit h two papers that he published while a faculty member at
the University: “A Field Experiment Comparing the Outcomes of Three Fraud
Brainstorming Procedures: Nominal Group, Round Robin, and Open Discussion,”
The Accounting Review 85 (3): 911 - 935 (“Fraud Br barnstorming”) and “The
Relationship between Perceived Tone at the Top and Earnings Quality,”
Contemporary Accounting Research 28 (4): 1190 - 1224 (“Tone at the Top”).
Because of concerns regarding Fraud Brainstorming
that the editors at The Accounting Review had been discussing with Dr.
Hunton since May 2012, the editors withdrew that paper in November 2012.
Bentley received the allegation of research misconduct from the confidential
reporter later that month. The confidential reporter also raised questions
about ten other articles that Dr. Hunton published or provided data for
while he was at Bentley, which, the reporter alleged, raised similar
questions of research integrity.
In my role as Ethics Officer, it was my duty to
make the preliminary determination n about whether the allegations warranted
a full investigation. To make that determination, I met with Dr. Hunton in
person when Bentley received this allegation, after I first instructed
Bentley IT to back up and preserve all of his electronic data store d on
Bentley’s servers. During that meeting, we discussed the allegation, I
explained the process that would be followed if I found an investigation was
warranted, and I described the need for his cooperation, including the
specific admonition that he pre serve, and make available to me, all
relevant materials, including electronic and paper documents. This
information and these instructions were confirmed in writing to Dr. Hunton.
Dr. Hunton resigned shortly after that meeting, which coincided with my de
termination that a full investigation was warranted.
In January 2013 as the investigation was just
getting underway, Bentley received the second allegation of research
misconduct from the editor of Contemporary Accounting Research. The editor
had contacted ted Dr. Hunton directly in November 2012 with concerns about
Tone at the Top after the Fraud Brainstorming paper was retracted. The
journal brought the issue to Bentley’s attention after the response it
received failed to resolve its concerns. When Bentley received this second
allegation, I informed Dr. Hunton of it, as well.
Continued in article
Jensen Comment
The last paragraph of the article suggests that Professor Hunton did not
cooperate in the investigation to the extent that it is unknown if his prior
research papers were also based upon fabricated data. The last paragraph reads
as follows:
Bentley cannot determine with confidence which
other papers may be based on fabricated data. We will identify all of the co
- authors on papers Dr. Hunton published while he was at Bentley that
involve research data. We will inform them that, unless they have
independent evidence of the validity of the data, we plan to ask the
journals in which the papers they co - authored with Dr. Hunton were
published to determine, with the assistance of the co - authors, whether the
data analyzed in the papers were valid. The various journals will then have
the discretion to decide whether any further action is warranted, including
retracting or qualifying, with regard to an y of Dr. Hunton’s papers that
they published
Years ago Les Livingstone was the first person
to detect a plagiarized article in TAR (back in the 1960s when we were both
doctoral students at Stanford). This was long before digital versions
articles could be downloaded. The TAR editor published an apology to the
original authors in the next edition of TAR. The article first appeared in
Management Science and was plagiarized in total for TAR by a
Norwegian (sigh).
Not much can be done to warn readers about hard
copy articles if they are subsequently "retracted." One thing that can be
done these days is to have an AAA Website that lists retracted publications
in all AAA journals. The Hunton and Gold article may be the only one
since the 1960s.
November 28, 2012 forward from Dan Stone
Anna Gold sent me the following statement and also
indicated that she had no objections to my posting it on AECM:
Explanation of Retraction (Hunton & Gold 2010)
On November 9, 2012, The Accounting Review
published an early-view version of the voluntary retraction of Hunton & Gold
(2010). The retraction will be printed in the January 2013 issue with the
following wording:
“The authors confirmed a misstatement in the
article and were unable to provide supporting information requested by the
editor and publisher. Accordingly, the article has been retracted.”
The following statement explains the reason for the
authors’ voluntary retraction. In the retracted article, the authors
reported that the 150 offices of the participating CPA firm on which the
study was based were located in the United States. In May 2012, the lead
author learned from the coordinating partner of the participating CPA firm
that the 150 offices included both domestic and international offices of the
firm. The authors apologize for the inadvertently inaccurate description of
the sample frame.
The Editor and the Chairperson of the Publications
Committee of the American Accounting Association subsequently requested more
information about the study and the participating CPA firm. Unfortunately,
the information they requested is subject to a confidentiality agreement
between the lead author and the participating firm; thus, the lead author
has a contractual obligation not to disclose the information requested by
the Editor and the Chairperson. The second author was neither involved in
administering the experiment nor in receiving the data from the CPA firm.
The second author does not know the identity of the CPA firm or the
coordinating partner at the CPA firm. The second author is not a party to
the confidentiality agreement between the lead author and the CPA firm.
The authors offered to print a correction of the
inaccurate description of the sample frame; however, the Editor and the
Chairperson rejected that offer. Consequently, in spite of the authors'
belief that the inaccurate description of the sample does not materially
impact either the internal validity of the study or the conclusions set
forth in the Article, the authors consider it appropriate to voluntarily
withdraw the Article from The Accounting Review at this time. Should the
participating CPA firm change its position on releasing the requested
information in the future, the authors will request that the Editor and the
Chairperson consider reinstating the paper.
Signed:
James Hunton Anna Gold
References: Hunton, J. E. and Gold, A. (2010), “A
field experiment comprising the outcomes of three fraud brainstorming
procedures: Nominal group, round robin, and open discussions,” The
Accounting Review 85(3): 911-935.
The explanation provided by the Hunton and Gold
regarding the recent TAR retraction seems to provide more questions than
answers. Some of those questions raise serious concerns about the validity
of the study.
1. In the paper, the audit clients are described as
publically listed (p. 919), and since the paper describes SAS 99 as being
applicable to these clients, they would presumably be listed in the U.S.
However, according to Audit Analytics, for fiscal year 2007, the Big Four
auditor with the greatest number of worldwide offices with at least one SEC
registrant was PwC, with 134 offices (the remaining firms each had 130
offices). How can you take a random sample of 150 offices from a population
of (at most) 134?
Further, the authors state that only clients from
the retail, manufacturing, and service industries with at least $1 billion
in gross revenues with a December 31, 2007 fiscal year-end were considered
(p. 919). This restriction further limits the number of offices with
eligible clients. For example, the Big Four auditor with the greatest number
of offices with at least one SEC registrant with at least $1 billion in
gross revenues with a December 31, 2007 fiscal year end was Ernst & Young,
with 102 offices (followed by PwC, Deloitte and KPMG, with 94, 86, and 83
offices, respectively). Limiting by industry would further reduce the pool
of offices with eligible clients (this would probably be the most limiting
factor, since most industries tend to be concentrated primarily within a
handful of offices).
2. Why the firm would use a random sample of their
worldwide offices in the first place, especially a sample including foreign
affiliates of the firm? Why not use every US office (or every worldwide
office with SEC registrants)? The design further limited participation to
one randomly selected client per office (p. 919). This design decision is
especially odd. If the firm chose to sample from the applicable population
of offices, why not use a smaller sample of offices and a greater number of
clients per office? Also, why wouldn’t the firm just sample from the pool of
eligible clients? Finally, would the firm really expect its foreign
affiliates to be happy to participate just because the US firm is asking
them to do so? Would it not be much simpler and more effective to focus on
US offices and get large numbers of clients from the largest US Offices
(e.g., New York, Chicago, LA) and fill in the remaining clients needed to
reach 150 clients from smaller offices?
3. Given the current hesitancy of the Big Four to
allow any meaningful access to data, why would the international offices be
consistently willing to participate in the study, especially since each
national affiliate of the Big Four is a distinct legal entity? The
coordination of this study across the firm’s international offices seems
like a herculean effort, at least. Further, even if the authors were not
aware that the population of offices included international offices, the
lead author was presumably aware of the identity of the partner coordinating
the study for the firm. Footnote 4 of the paper and discussion on page 919
suggest that the US national office coordinated the study. It seems quite
implausible that the US national office alone would be able to coordinate
the study internationally.
4. In the statement that has been circulated among
the accounting research community, the authors state:
“The second author was neither involved in
administering the experiment nor in receiving the data from the CPA firm.
The second author does not know the identity of the CPA firm or the
coordinating partner at the CPA firm. The second author is not a party to
the confidentiality agreement between the lead author and the CPA firm.”
However, this statement is inconsistent with
language in the paper suggesting that both authors had access to the data
and were involved in discussions with the firm regarding the design of the
study (e.g. Footnote 17). Also, isn’t this kind of arrangement quite odd, at
best? Not even the second author could verify the data. We are left with
only the first author’s word that this study actually took place with no way
for anyone (not even the second author or the journal editor) to obtain any
kind of assurance on the matter. Why wouldn’t the firm be willing to allow
Anna or Harry Evans to sign a confidentiality agreement in order to obtain
some kind of independent verification? If the firm was willing to allow the
study in the first place, it seems quite unreasonable for them to be
unwilling to allow a reputable third party (e.g. Harry) to obtain
verification of the legitimacy of the study. In addition, assuming the firm
is this extremely vigilant in not allowing Harry or Anna to know about the
firm, does it seem odd that the firm failed to read the paper before
publication and, therefore, note the errors in the paper, including the
claim that is made in multiple places in the paper that the data came from a
random sample of the firm’s US offices?
5. Why do the authors state that the paper is being
voluntarily withdrawn if the authors don’t believe that the validity of the
paper is in any way questioned? The retraction doesn’t really seem
voluntary. If the authors did actually offer to retract the study that
implies that the errors in the paper are not simply innocent mistakes.
Given that most, if not all US offices would have
had to be participants in the study (based on the discussion above), it
wouldn’t be too hard to obtain some additional information from individuals
at the firms to verify whether or not the study actually took place. In
particular, if we were to locate a handful of partners from each of the Big
Four who were office-managing partners in 2008, we could ask them if their
office participated in the study. If none of those partners recall their
office having participated in the study, the reported data would appear to
be quite suspect.
Sincerely,
Harry Markopolos
Jensen Comment
Thanks to the Ethics Officer at Bentley College on July 14, 2014 we now know
more of the story.
I have no idea what happened to Professor Hunton after he resigned from
Bentley University in 2012.
Jensen Comment
One question is whether this is mostly a filtering criterion or a genuine
criterion for hiring. For example, some popular business schools require
students to complete two courses in calculus before matriculating as
undergraduate business majors. It's not so much that calculus is a prerequisite
for business courses as it is that calculus weeds out the dummies.
It's doubtful that many Big Four partners can code.
More important are perceived trustworthiness and going the extra mile in client
relations. In my opinion, most partners are the ones visible in public service
(such as volunteer work for communities), work pro bono a lot of nights and
weekends, and play a lot of golf with clients and prospective clients. I used to
belong to a downtown bridge club in Bangor, Maine. A senior partner in a law
firm who belonged to that club told me that his job was to get the clients that
were served by his technical staff. Some partners with marginal devotion
devotion to religion are extremely active in their churches, mosques, and
synagogues. My point --- for partners it's the extra hours of the week building
relationships outside the office that really count.
The Big Four are quintessentially global
organisations, their logos adorn major commercial centres and they are
prominent players in most western economies. Unlike their corporate
counterparts, their governance structures are more opaque. This is a
consequence of the partnership model which gives a high degree of
independence to each country in which the Big Four operates. Global
organisations –in general – and the Big Four in particular invite the
following question: to what extent is there convergence or divergence
between their operations in different countries?
We set out to answer this question by researching
partners in Canada, France and the UK. We were particularly interested in
the types of people that became partner and the process of them actually
getting there. Was this similar across the three countries or were there
striking differences?
The broad career structure is much the same across
the three contexts: following qualification, employees move into the manager
position – during which time many tend to leave the firm – before proceeding
to senior manager, director and ultimately partner. Only 2-3% of members of
the Big Four will ever make partner; ascension to this position is to enter
the elite of the accounting profession. In provincial cities, Big Four
partners are well known “business celebrities”, while in capital cities they
are players within their service lines. Partners are the pinnacle of the
accounting profession for those that remain in private practice.
We started by looking at British and Canadian
partners. What we found was remarkably similar: it takes most partners 15-17
years to become a partner after joining; 60 to 70 hour weeks are the norm;
partners are more likely to be white and male; the process of becoming a
partner has become far more formalised than it was in the past; most people
who make partnership highlight the importance of “having a good mentor” to
help them navigate the complex, Byzantine politics of a Big Four firm.
To add to this picture, interviewees emphasised the
importance of trust: does the firm trust a candidate enough to make them a
part-owner? All of this takes place against a broader economic backdrop
which will determine whether a particular service is deemed worthy of
supporting a further partner. The economic conditions can in boom times
create more partnerships in a firm; recessionary times can preclude gifted
candidates from making partner.
We talked to over 50 partners, ex-partners and
people who didn’t make partner in Britain and Canada. The similarities far
overshadowed any differences. Partners were very much “self-made men” and,
save for a few exceptions, were drawn from modest social backgrounds. This
meritocratic quality was deeply infused within the firms we visited, with a
notable ‘can do’ ethos. The driven quality of the partners often extended to
their leisure pursuits. Whereas the stereotype is of a partner playing a
good deal of golf, they were much more likely to be competing in endurance
cycle races or long distance running events. The participation in endurance
sports is a fitting metaphor. Partners are driven, high energy people who
exude self-confidence.
By midway through our research we were accustomed
to partners recounting that “their career was different”. This statement
surprised us as most of the partners spent most of their careers in one
firm, something that is very unusual in the contemporary workplace, and we
imagined that there was a distinct career path. The expression, however,
spoke to the different ways in which the partners had proved themselves.
In every case, the accountant “proved themselves”
through completing a difficult piece of work that gained praise from the
firm. This demonstrated that the accountant had ability and could be trusted
by the organisation. This building of reputation brought the accountant into
new networks in the firm where more opportunities arose. Proving oneself as
being very good at a complex job is generally enough to get a promotion to
director. Beyond that, wannabe partners need to demonstrate that they can
move effortlessly with senior executives in client firms and that they can
generate revenue. It’s a cliché, but cash is king. The Big Four are packed
full of extremely competent technical specialists – what makes someone stand
out is their ability to generate fee income. Entrepreneurialism is a prime
quality.
The similarities between British and Canadian
partners were striking regarding this topic, in fact the only compelling
difference was that British partners went for football and rugby metaphors,
while their Canadian counterparts used ice hockey and NFL.
We travelled to France to find out about the French
experience. Our intuition was that the capacity to generate new business
would be crucial there too but that leverages to increase turnover might be
of a different nature. In particular we expected that belonging to a
cultural or social elite would be essential for partners to bring in new
business in France. The Big Four are similarly prominent in France, although
there are different rules around audit rotation. What became immediately
clear was the Big Four are structured differently in France.
First, it was incredibly important where an
employee had studied. In France, there are a number of Grandes Ecoles that
are, in effect, elite Business Schools. The Big Four strive to recruit a
quota from each of these schools. Unlike in Britain, where the Big Four
recruit from a wide range of universities and where partners are pretty
diverse in terms of their educational backgrounds, in France attending one
of these Grande Ecoles will vastly increase your chances of getting
recruited in the first instance, and is even more important in rising to
partner grade in the second instance. One of our French partners explained:
“We are worried when we don’t have enough ‘parisiennes’ [graduates of top
Grandes Ecoles]. I find that daft but in this firm we always have the
illusion that if you haven’t been to a ‘parisienne’ then you can’t be a
partner. That said, given that the clients of tomorrow will have studied at
the same place, it is better to have them.”
The quote reveals a great deal about how
educational background is a determinant of future success in the Big Four in
France. Simply put, having graduated from a top school (a parisienne) marks
out an employee as special and puts them onto a different career trajectory
from those who had attended more routine universities. In France Big Four
firms agree with each other on starting salary grids depending on the school
category of their recruits. High expectations are placed very early on their
recruits from Grandes Ecoles and this has a very basic economic rationale.
It is through the process of offering parisiennes
more varied and exciting work – projects that add value and generally
“pampering” them – that their “specialness” becomes a reality in the French
Big Four. Contrary to what we expected, educational pedigree actually
becomes more important at the partner level: it is easier for graduates of
the Grandes Ecoles to interact with each other and so future sources of
revenue will come through the conversion of their educational background
into social skills and new business for the firm. It is a fascinating
contrast to the British and Canadian experiences where the treatment of
recruits is much more homogeneous. More broadly, the French experience is
suggestive of the grip that Grandes Ecoles have on elite careers within the
French corporate sector.
The Grandes Ecoles cast a long shadow over the Big
Four in France; this raises questions as to whether a different set of
qualities are required to become partner. A key insight from our research
study is that the pressures that French partners and aspirant partners face
are much the same as in Britain and Canada: clients need to be kept happy;
new business needs to be generated and delivered; new service lines need to
be developed; for personal career strategies, aspirant partners need to be
seen as less technical and more strategic.
In short, the descriptions of the Big Four in
France were remarkably similar to their counterparts in Britain and Canada.
What was particularly striking was the creed of commercialism that underpins
the Big Four across the three countries. One partner in France explained:
“The first thing we look at is [the candidate’s] commercial skills. Dilution
[of profit-per-partner] is a real concern for us. If partners don’t bring in
revenue, the partners’ committee will lose money because there is less to
share in the end. So the capacity to make business grow obviously matters a
lot.”
This quote could have come from any of the firms in
any of the three countries. The ability to generate business and ‘grow the
cake’ is an absolutely central skill for someone who wants to make partner.
The central difference between Britain, Canada and France is that in the
French case the assumption is that being a graduate of a Grandes Ecoles will
help generate new business. In Britain and Canada it is demonstrably not the
case that an elite degree will lead to these outcomes. In France, attendance
at one of these schools has a huge bearing on an alumnus’s future career in
the Big Four.
Our research emphasises that people skills – the
ability to get on with people and build durable networks – are crucial to
success in a Big Four career. These skills need to be converted into
revenues. To put this in some sort of context, the following revenues were
quoted to us. In Canada, one interviewee suggested that a partner needed to
generate around $3m (Canadian) per annum (£1.63m), in France this figure was
estimated at €3m (£2.4m), whereas in Britain, a figure of £2m was frequently
cited. Partners are clearly under pressure to generate vast sums of fee
income for the Big Four; the prospect of being able to generate such fees is
crucial to ascending to a partnership.
If online education is a tsunami threatening
the future of business schools, consider a recent
report from two
professors at the University of Pennsylvania’s
Wharton School an emergency manual on where top
business schools should seek high ground.
Karl Ulrich, Wharton’s vice dean of innovation, and
Christian Terwiesch, a professor of operations and information management,
write in a paper published on Wednesday that the video technology used in
massive open online courses (MOOCs) would make MBA classes 40 percent
cheaper to produce. A shift to this cheaper model would radically alter the
traditional full-time MBA, which relies on lots of professors to offer
in-class lectures.
Business schools have
tiptoed around big shifts so far (for example,
only a handful of top B-schools have put their MBA programs online), but
full-time MBA programs have three options if they want to avoid irrelevance
or extinction, the authors write:
Give students a bigger, better MBA program
The professors, who have both taught popular MOOCs,
calculated that schools spend about 100 times less for each student to
finish an online course than a traditional course. They write that schools
should harness those potential cost savings by remaking full-time MBA
programs into campus programs that give students less classroom time, but
more time for experiential learning or study abroad.
This is pretty close to the status quo for
B-schools, they admit, but schools could still enhance the student
experience. “You can either leave the old customer satisfaction in place and
you have cost savings, or you hold cost per students constant and you can
provide a more worthwhile experience for students,” says Terwiesch.
“Dramatically” downsize tenure-track
faculty
The professors pose a question in the title of the
paper: “Will video kill the classroom star?” They don’t answer the question
definitively, but do say B-schools have the clear option of “dramatically”
slicing the number of tenure slots once online education becomes dominant.
Professors that can become masters of video will likely get higher salaries
as a result, they write.
This route isn’t as likely to happen at top
B-schools that have strong enrollments and don’t face serious cost
pressures, but would appeal to other colleges and universities under
financial duress, they write. The point hits a nerve across higher
education: Moody’s Investors Service reported on Monday that higher
education faces a negative financial outlook in part because MOOCs have
“accelerated the pace of change in online delivery models over the last two
years.”
To avoid the ax, business faculty “should think
about what can we do to deliver value to our customers so when the world
changes, we’re not a Kodak married to an old technology,” Terwiesch says.
Switch to an iTunes model
The professors compare a full-time MBA program to a
Swiss army knife that students can buy today to bone up on basic finance,
management, and marketing to “use it one day in the future.” MOOC technology
could make that model irrelevant because too much time elapses between when
students learn a skill and then put it into action in the workplace.
Instead, “business education has the potential to
move to mini-courses that are delivered to the learner as needed, on
demand,” they write. B-schools could also certify specific skills instead of
bundling courses together. That kind of shift would “dramatically change the
way in which business education is delivered.”
Question
When can an auditor having sex with the Chief Accounting Officer (CAO) be an
appropriate application of "detail testing?"
Possibility
It may beat statistical sampling and analytical review combined. Maybe it should
not ipso facto get a bad rap. But it does become more difficult to remain
independent.
Yeah it probably should get a bad rap for the same reason teachers should not
assign grades to students with whom they are "sleeping."
Ventas, Inc. (NYSE: VTR) (“Ventas” or the
“Company”) today announced that the Company has dismissed Ernst & Young
(“E&Y”) as its public accounting firm, effective July 5, 2014, due to
E&Y’s determination that it was not independent solely as a result of an
inappropriate personal relationship between an E&Y partner and Ventas’s
former Chief Accounting Officer and Controller. Ventas also announced
that, following such dismissal, its Audit Committee has engaged KPMG LLP
(“KPMG”) as the Company's independent public accounting firm.
E&Y has advised the Company that, solely due to
the inappropriate personal relationship, it determined that it was not
independent of the Company during the periods in question. As a result
of such determination, E&Y stated that it was obligated under applicable
law and professional standards to withdraw (and it has withdrawn) its
audit reports on the Company’s financial statements for the years ended
December 31, 2012 and 2013, and its review of the Company’s results for
the quarter ended March 31, 2014. E&Y’s decision to withdraw such audit
reports and review was made exclusively due to the personal relationship
in question, and not for any reason related to Ventas’s financial
statements, its accounting practices, the integrity of Ventas’s controls
or for any other reason.
The crony in question, one Robert J. Brehl, has "separated himself" from
his duties as Chief Accounting Officer and Controller.
Continued in article
Added Jensen comment?
Are the working papers on this audit X-rated?
I'd like to express my heart-felt thanks to the
New Zealand Association of Economists for making
me a Distinguished Fellow.
The award took place last Thursday evening at
the dinner for the 55th Conference of
the Association, in Auckland. The award was most
humbling, all the more so for coming from those
who first supported me in my career.
Recipients of this award in recent years have
included such ex-pats as Peter Phillips, Stephen
Turnovsky, Leslie Young. John McMillan, and John
Riley. All the more reason for me feeling
humbled.
Pitarakis, J-Y., 2014. A joint test for
structural stability and a unit root in
autoregressions. Computational Statistics and
Data Analysis, 76, 577-587.
Gresnigt, F., E. Kole, and P. H. Franses,
2014. Interpreting financial market crashes as
earthquakes: A new early warning system for
medium term crashes. Tinbergen Institute
Discussion Paper TI 2014-067.
Marsh, P., 2013.
A review of non-parametric
econometrics. Econometrics Journal,
16, B1-B3(3).
Jensen Comment
The following article makes no sense to me. To compete with for-profit
universities you have to lower admission hurdles to zero apart from ability to
pay.
US News has tried for years to rank for-profit
universities, but they don't want to provide the data.
The University of Georgia’s
Terry College of Business
announced last week that it will offer an online
bachelor of business administration starting in January. While business
schools have begun offering online MBAs in earnest, offering quality
undergraduate business degrees online “seems like a niche that isn’t being
filled,” says Myra Moore, Terry’s director of assessment, rankings, and
undergraduate programs.
UGA hopes its new program will attract students who
need a degree to get ahead at work, as well as regional stay-at-home parents
and military officers, says Moore. “There are for-profit institutions that
attempt to serve this group, like University of Phoenix and Strayer. We
think we can offer them much better quality at a better price.”
European banks and other banks outside the U.S.
will have to record losses on bad loans more quickly and set aside more
reserves for loan losses under an overhaul of finance-accounting rules that
global rule makers made final on Thursday.
Under the new standard, non-U.S. banks will have to
book loan losses based on their expectation that future losses will occur,
beginning in 2018. That is expected to speed up the booking of losses and
require greater loan-loss reserves.
Currently, banks don't record losses until they
have actually happened, but many observers believe that method led banks to
be too slow in taking losses during the financial crisis.
The move by the London-based International
Accounting Standards Board, which has been in the works for years, could
create a conundrum for the banking industry: Because U.S. and global rule
makers haven't been able to agree on the same accounting approach for
writing off bad loans, it could become more difficult to compare U.S. banks
and those outside the U.S.
U.S. and global rule makers have been striving for
years to eliminate differences between their rules in some major areas of
accounting, including loans and other financial instruments, but the effort
has been plagued by problems and delays. The two systems have gotten more
similar in some areas, but on this banking issue, some analysts say they are
growing more different.
The Financial Accounting Standards Board, the U.S.
accounting rule-setter, has proposed U.S. banks switch from the
incurred-loss model that both use now to the expected-loss approach, too.
But the two disagree on just how rapidly banks should book their loan
losses.
The IASB will require non-U.S. banks to immediately
book only those losses based on the probability that a loan will default in
the next 12 months. If the loan's quality gets significantly worse, other
losses would be recorded in the future. The IASB move will affect all
financial assets on non-U.S. companies' balance sheets, but the treatment of
bank loans is particularly important due to the role that soured loans and
credit losses play in their businesses.
The change "will enhance investor confidence in
banks' balance sheets and the financial system as a whole," said Hans
Hoogervorst, chairman of IASB, which sets accounting rules for most
countries outside the U.S.
The Institute of Chartered Accountants in England
and Wales, a London-based accountants' group, estimated that the IASB
changes will increase banks' loan-loss provisions by about 50% on average.
Iain Coke, head of ICAEW's financial-services faculty, said the new rule,
combined with tougher regulatory-capital requirements, may force banks to
hold more capital for the same risks. "This may make banks safer but may
also make them more costly to run," he said.
The FASB proposal, however, would require all
losses expected over the lifetime of a loan to be booked up front—so if it
is enacted, U.S. banks would record more losses immediately than banks in
other countries, and might have to set aside more reserves, hurting their
current financial results and making them look worse compared with foreign
banks, many banking and accounting observers believe. The FASB hasn't
completed its proposed changes, though it hopes to do so by year-end.
"It's unfortunate that we do have a different
standard being issued," said Tony Clifford, a partner with Big Four
accounting firm EY.
The IASB said in documents laying out its proposal
Thursday that although it and the FASB had made "every effort" to agree on
the same approach, "ultimately those efforts have been unsuccessful."
Christine Klimek, a FASB spokeswoman, said the FASB
believes its approach "best serves the interests of investors in U.S.
capital markets because it better reflects the credit risks of loans on an
institution's balance sheet." IASB's approach likely would lead to lower
loan-loss reserves than FASB's at U.S. banks, she said, "which would have
been counterintuitive to the lessons learned during the recent financial
crisis."
In addition, Mr. Clifford said, the new IASB rule
requires banks to use their own judgment to a greater extent than existing
rules when determining their expected losses, and that could lead to
differences between individual banks that could make it harder for investors
to compare them.
Among other provisions of the new rule the IASB
issued Thursday, non-U.S. banks will no longer have to record gains to net
income when their own creditworthiness declines, and losses when their
creditworthiness improves—a counterintuitive practice known in the U.S. as
"debt/debit valuation adjustments," or DVA. Those gains and losses will be
stripped out of the banks' net income and be placed into "other
comprehensive income," a separate measurement that doesn't affect the main
earnings number tracked by most investors. Banks can adopt that change
separately, before the rest of the IASB rule.
The FASB has proposed a similar move for U.S. banks
but has yet to enact it.
From the CFO Journal's Morning Ledger on July 29, 2014
As it turns out, all kinds of people can become
whistleblowers.
A Freedom of Information Act request by The Wall Street Journal into the
more than 6,500 people who have offered confidential information under the
Securities and Exchange Commission’s confidential whistleblower program
yielded job titles for nearly 3,600 of them,
CFOJ’s Maxwell Murphy reports. And while retirees
were the largest group with 365 tips, the rest included adult entertainers,
engineers, pilots and even a pastor.
At least 42 of the tips came from senior executives
and board members, according to the listed titles, but executives may want
to watch what they say in restaurants, bars and taxis, because a number of
them also came from hospitality and service employees.
Still, the vast majority of reports don’t come to
anything, and even a successful prosecution can take years from the initial
report and ensuing follow-up interviews to any penalties actually being
assigned. The program has brought in more than $150 million in restitution
and fines via just five cases from eight whistleblowers. That translated
into more than $15 million in payments to whistleblowers—$14 million of
which went to just one person.
From the CFO Journal's Morning Ledger on July 25, 2014
Audit quality, transparency, auditor retention and
other financial reporting matters relevant to audit committees have been on
regulator's agendas in recent months. The SEC, PCAOB and other regulatory
bodies are actively soliciting the audit committee's views on various topics
and initiatives, and have released a variety of publications, communications
and resources targeted to committee members. The recent issue of the
Deloitte's “Audit Committee Brief” discusses recent domestic and
international regulatory developments that are likely to affect audit
committees, and includes links to a variety of resources for further
information.
From the CFO Journal's Morning Ledger on July 24, 2014
Good morning. The Securities and Exchange Commission
yesterday voted to force large institutional and corporate investors in
money-market funds to abandon the stable buck-a-share value, as had been
expected. But in an effort to head off business concerns that the funds will
become unworkable for companies that will now need to record gains and
losses on their holdings, the SEC said it worked with the Treasury
Department and the Internal Revenue Service to develop new tax guidance that
aims to limit the accounting headaches,
CFOJ’s Emily Chasan reports.
But that move addresses just one of the many concerns
raised by users of the funds and even some regulators, underscoring SEC
Chairwoman Mary Jo White’s position that the need to drain risk from money
funds is more important than the challenges that new rules may inflict.
Cathy Gregg, a partner at Chicago-based Treasury
Strategies, said
some investors may pull backfrom money funds because of the new
rules, “because they’re not permitted to invest in a floating-rate product
like that.” And Kara Stein, one of two SEC commissioners to vote against the
new rules, said she feared the redemptions restrictions they include might
spark, rather than curb, investor flight from the funds in a crisis.
From the CFO Journal's Morning Ledger on July 22, 2014
Venezuela’s car culture fades as dollars are
hard to come by.
Production is drying up in what was once South America’s third-largest auto
industry as big auto makers can’t obtain dollars to pay parts suppliers and
sky-high inflation turns older cars into investment vehicles, the
WSJ’s Ezequiel Minaya reports.
Balance sheets have been battered, with revenue vulnerable to devaluation
and trapped in Venezuela because of currency controls.
Jensen Comment
The irony is that fuel is almost free in oil-rich Venezuela. But violent car
stealing, funerals, and spare parts are so expensive that it's best to deeply
hide the car from sight.
Jensen Comment
This raises several issues, one being whether living on campus is an option. For
example, some colleges require that campus police chiefs, campus fire chiefs,
chaplains, chief campus medical officers, presidents, computer center directors,
and some other officials live on campus. Those officials generally cannot own
their campus homes and may or may not pay rent. For income tax purposes an
implied rent must be factored into taxable benefits on federal and state income
tax returns..
At Harvard some faculty live apartments in student dormitories --- the idea
being that faculty and students living in one building can have educational
benefits. I used to visit a professor at the Harvard Business School who lived
with his wife in an apartment within a HBS dorm.
The larger issue is the extent to which students, faculty, and administrators
use costly municipal services even though they live on campus. For example,
Stanford University pays the costs of its own campus streets, police, and
elementary schools for parents living on campus. But when I lived in campus
housing with my wife and children Stanford did not provide high school and
community college services wcwn though our children were too young to use such
services. Our kids did attend a Stanford elementary school. I'm not sure about
fire protection services, but I think these were provided by the City of Palo
Alto. Even if students, faculty, and administrators live on campus, there
is often an arrangement for a college to pay the town for costs of some but not
all services without paying property taxes on student, faculty, and
administrator housing on campus.
I remember when I lived in San Antonio that one of the local colleges was
having a dispute with the City regarding taxation of an off-campus home owned by
the college. It was several miles from campus and was provided for zero rent to
the college's president. I don't know how this dispute was resolved but rumor
had it that all colleges in San Antonio eventually paid property taxes on
faculty and administrator housing. I don't think student housing is taxed most
anywhere in the USA if it is owned and operated by a college.
Does the President of the USA have to factor in White House rent when filling
out Form 1040? Does Washington DC tax the White House at fair value? I doubt it!
From the CPA Newsletter on July11, 2014
IRS tightens rules on IRA rollovers The Internal Revenue
Service formalized a new interpretation of the one-rollover-per-year rule
for IRAs by withdrawing proposed regulations from 1981 that had allowed
taxpayers with multiple IRAs to make one rollover per year from each IRA.
Starting in 2015, taxpayers will only be able to make one rollover per year
no matter how many IRAs they own.
Journal of Accountancy online
(7/10)
Where are governmental payments (especially tax refund, Medicaid, Medicare,
disability, and unemployment fraud) internal controls? What controls?
From the CPA Newsletter on July 9, 2014
Improper government payments reached $100B in 2013
By its own reckoning, the U.S. government made $100 billion in improper
payments last year in the form of tax credits and unemployment benefits to
people who didn't qualify, and medical payments for unnecessary procedures.
Improper payments peaked in 2010, reaching $121 billion. The government has
been trying to put controls in place to address this issue. The House
Subcommittee on Government Operations is holding a hearing today on the
matter.
San Francisco Chronicle (free content)/The Associated Press
(7/9
The IRS tells taxpayers facing an audit that it’ll get
back to them quickly and then often falls short of that goal,
GAO said that the IRS has “misled taxpayers by
providing unrealistic time frames” — saying it would get back to audited
taxpayers within 30 to 45 days.
In fact, the watchdog says the IRS consistently
takes several months to respond to correspondence audits, which are done
through the mail and account for about three-quarters of the audits
conducted by the tax agency.
In all, GAO says that the IRS is behind on more
than 50 percent of the correspondence that taxpayers send in to deal with
audits.
That misleading time frame that the IRS circulates
for audits hurts both taxpayers and agency staffers, according to the
report.
Taxpayers, for instance, often can’t get their
refunds until an audit is finished.
IRS staffers, meanwhile, have to deal with extra
phone calls because taxpayers are told to expect a response before the
agency can reasonably offer one. Those staffers say they often have few
answers for taxpayers wondering when the IRS will respond.
The IRS agreed to implement the GAO’s
recommendations, which push the agency to better document how quickly it can
get back to audited taxpayers and to give those taxpayers a more accurate
timeline.
But a top IRS official also suggested that the
budget cuts the agency has absorbed in recent years played a role in the
unrealistic timeline for audited taxpayers.
Research shows that the majority of fathers believe all companies
should offer some form of paid leave for them to spend time with their
newborns, but only a small percentage of American companies — 14% according
to the
Families and Work Institute — currently offer paid
paternity leave.
That might change. With more Gen Xers and
millennials starting their families and expecting more flexibility from
employers, Twaronite says she's seen a cultural shift in the past decade or
so.
Ernst & Young introduced its paternity leave policy
12 years ago. The accounting giant offers two weeks of paid leave to all new
fathers, and up to six weeks for fathers acting as the primary
caregiver. While tech companies like Facebook and Yahoo have attracted
attention in the past few years for offering extremely generous paid
paternity leaves —
four months and two months, respectively — EY
started offering the benefit long before there was a public demand for it.
"There were some who thought it was silly and that
there would be no participation," Twaronite says. It started as a perk that
many men were happy to take, but today it is seen as an essential benefit,
she says.
EY doesn't offer paternity leave simply for the
sake of being progressive. It firmly believes that it helps with employee
retention, saving money on rehires and increasing engagement, Twaronite
explains. Between 500 and 600 EY employees
take advantage of paternity leave each year.
A recent report called "The
New Dad," which is the fifth annual study of
working fathers by Boston
College's Center for Work & Family (CWF) and is
sponsored by EY, shows an increasing trend in professional men wanting paid
paternity leave.
The CWF surveyed 1,029 fathers at 286 companies.
While it's important to note that 58%
of respondents came from the CWF's network of companies,
meaning most were highly educated professionals at
companies with progressive benefits,
the report shows that most men will take paid paternity leave if it is
offered and will take the maximum amount of time offered.
Study: 1M Americans might lose federally insured pensions More than 1 million
Americans covered by multiemployer pension plans are in danger of losing
retirement benefits when the plans collapse in the next few years, according
to a study by the Pension Benefit Guaranty Corp. The study says that as
these plans fail, federal insurance that is supposed to protect members'
benefits "is more likely than not to run out of money within the next eight
years."
The New York Times (tiered subscription
Abstract:
Auditors frequently rely on valuation specialists in audits of fair values
to help them improve audit quality in this challenging area. However,
auditing standards provide inadequate guidance in this setting, and problems
related to specialists’ involvement suggest specialists do not always
improve audit quality. This study examines how auditors use valuation
specialists in auditing fair values and how specialists’ involvement affects
audit quality. I interviewed 28 audit partners and managers with extensive
experience using valuation specialists and analyzed the interviews from the
perspective of Giddens’ (1990, 1991) theory of trust in expert systems. I
find that while valuation specialists perform many of the most difficult and
important elements of auditing fair values, auditors retain the final
responsibility for making overall conclusions about fair values. This
situation causes tension for auditors who bear responsibility for the final
conclusions about fair values, yet who must rely on the expertise of
valuation specialists to make their final judgments. Consistent with this
tension, auditors tend to make specialists’ work conform to the audit team’s
prevailing view. This puts audit quality at risk. Additional threats to
audit quality arise from the division of labor between auditors and
valuation specialists because auditors, though ultimately responsible for
audit judgments, must rely on work done by valuation specialists that they
cannot understand or review in the depth that they review other audit work
papers. This study informs future research addressing problems related to
auditors’ use of valuation specialists, an area in which problems have
already been identified by the PCAOB and prior research.
Jensen Comment 1
One of the problems is that some types of valuation may rely upon the same
defective databases no matter whether they are used by employees of audit firms
or outsourced valuation specialists hired by audit firms.Exhibit A is that
virtually all valuation experts of interest rate swaps and forward contracts
using the LIBOR underlying were relying upon LIBOR yeild curves in the Bloomberg
or Reuters database terminals that were using LIBOR rates manipulated
fraudulently by the large banks like Barclays ---
http://en.wikipedia.org/wiki/Libor
On 28 February 2012, it was revealed that the U.S.
Department of Justice was conducting a criminal investigation into Libor
abuse.[49] Among the abuses being investigated were the possibility that
traders were in direct communication with bankers before the rates were set,
thus allowing them an advantage in predicting that day's fixing. Libor
underpins approximately $350 trillion in derivatives. One trader's messages
indicated that for each basis point (0.01%) that Libor was moved, those
involved could net "about a couple of million dollars".[50]
On 27 June 2012, Barclays Bank was fined $200m by
the Commodity Futures Trading Commission,[7] $160m by the United States
Department of Justice[8] and £59.5m by the Financial Services Authority[9]
for attempted manipulation of the Libor and Euribor rates.[51] The United
States Department of Justice and Barclays officially agreed that "the
manipulation of the submissions affected the fixed rates on some
occasions".[52][53] On 2 July 2012, Marcus Agius, chairman of Barclays,
resigned from the position following the interest rate rigging scandal.[54]
Bob Diamond, the chief executive officer of Barclays, resigned on 3 July
2012. Marcus Agius will fill his post until a replacement is found.[55][56]
Jerry del Missier, Chief Operating Officer of Barclays, also resigned, as a
casualty of the scandal. Del Missier subsequently admitted that he had
instructed his subordinates to submit falsified LIBORs to the British
Bankers Association.[57]
By 4 July 2012 the breadth of the scandal was
evident and became the topic of analysis on news and financial programs that
attempted to explain the importance of the scandal.[58] On 6 July, it was
announced that the U.K. Serious Fraud Office had also opened a criminal
investigation into the attempted manipulation of interest rates.[59]
On 4 October 2012, Republican U.S. Senators Chuck
Grassley and Mark Kirk announced that they were investigating Treasury
Secretary Tim Geithner for complicity with the rate manipulation scandal.
They accused Geithner of knowledge of the rate-fixing, and inaction which
contributed to litigation that "threatens to clog our courts with
multi-billion dollar class action lawsuits" alleging that the manipulated
rates harmed state, municipal and local governments. The senators said that
an American-based interest rate index is a better alternative which they
would take steps towards creating.[60] Aftermath
Early estimates are that the rate manipulation
scandal cost U.S. states, counties, and local governments at least $6
billion in fraudulent interest payments, above $4 billion that state and
local governments have already had to spend to unwind their positions
exposed to rate manipulation.[61] An increasingly smaller set of banks are
participating in setting the LIBOR, calling into question its future as a
benchmark standard, but without any viable alternative to replace
Jensen Comment 2
FAS 133 and IAS 39 ushered in national and international requirements to book
derivative contracts at fair values and adjust those values to "market" at least
every 90 days. However, those "markets" are replete with market manipulation
scandals that corrupt the databases used by valuation experts---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
An accounting professor says shareholders need
accountants to keep track of asset history, not to forecast future prices.
"Why Fair-Value Accounting Isn’t Fair," by
Charles Lee, Stanford University Graduate School of Business, July 2014 ---
Click Here
During the darkest days of the financial crisis,
banks came under scathing criticism for using traditional accounting
practices to minimize their massive losses tied to junk mortgages.
The culprit, according to many financial reformers,
was the practice of valuing financial assets on the basis of their
historical cost. Even if subprime borrowers were still paying on time, the
critics said, their mortgages and the securities backed by them had become
almost worthless on the open market. Nobody wanted to buy them. To the
critics, the banks were pretending that their capital was still strong when
much of it had been wiped out.
To promote transparency, reformers have pushed
banks and all other companies to embrace “fair-value’’ accounting – valuing
assets on the basis of the current price they would fetch if they were put
up for sale. It’s not just an issue for mortgage loans and bank balance
sheets. Supporters of fair-value accounting would apply it to most other
tradable assets, even patents.
Charles Lee, professor of accounting at Stanford
Graduate School of Business, begs to disagree.
Fair-value accounting, he argues, goes against the
fundamental purpose of accounting. It would actually inject more uncertainty
into financial reporting and make life harder for shareholders. It might
even create new opportunities for companies to cook their books.
In a combative
keynote address
at a London accounting conference last December, Lee argued that fair-value
accounting confounds and confuses the core purpose of rigorous accounting.
That purpose, he contends, is to provide economic history — an accurate
report on transactions that have already occurred.
Market-value assessments represent something
entirely different: collective forecasts about future returns. They embody
the combined judgment of investors, buyers, and sellers about future cash
flows, future growth, and future economic conditions.
Lee isn’t disparaging market valuations. In fact,
he argues that the most important component of a company’s market value lies
in shareholder expectations about its future earnings. But the purpose of
accounting isn’t to make those forecasts, he insists. The purpose is to give
shareholders the tools they need to make their own forecasts.
Continued in article
A very concise summary of the positions of various accounting theory
experts in history since 1909 and authoritative bodies over the years since
1936:
"Asset valuation: An historical perspective"
Authors: Racliffe, Thomas A. (Thomas Arthur) and Munter, Paul Accounting Historians Journal
1980
http://umiss.lib.olemiss.edu:82/record=b1000230
Jensen Comment: I really liked this summary of the valuation
literature prior to 1980.
For example, what was the main difference between exit
value advocates Chambers versus Sterling?
Things were fine before the accounting
standards-setters barged in and "destroyed hundreds of billions of dollars
of capital," he contends.
In perhaps the most sweeping indictment of
fair-value accounting to date, the chairman of the Federal Deposit Insurance
Corporation during the 1980s savings-and-loan debacle told the Securities
and Exchange Commission today that mark-to-market accounting rules caused
the current financial meltdown.
Speaking at an SEC panel on mark-to-market
accounting and the recent period of market turmoil, William Isaac, FDIC
chairman from 1978 to 1985 and now the chairman of a consulting firm that
advises banks, said that before FAS 157, the controversial accounting
standard issued in 2006 that spells out how companies should measure assets
and liabilities that have been marked to market, took hold, subprime losses
were “a little biddy problem.”
Isaac rhetorically asked the participants how the
financial system could have come upon such hard times in under two years. “I
gotta tell you that I can’t come up with any other answer than that the
accounting system is destroying too much capital, and therefore diminishing
bank lending capacity by some $5 trillion,” he asserted. “It’s due to the
accounting system, and I can’t come up with any other explanation.”
As of late 2006, Isaac, now chairman of The Secura
Group, a financial institutions consulting firm, argued, “inflation was
under control, economic growth was good, unemployment was low, and there
were no major credit problems in the banking system.” There were $1.2
trillion worth of U.S. subprime mortgages, with about $300 billion provided
by FDIC-insured banks and the rest held by investors world-wide.
Since subprime losses were estimated to be about 20
percent in 2006, federally insured U.S. banks had lost about $60 billion in
that market, according to Isaac. But those banks had recorded about $150
billion in after-tax earnings and had $1.4 trillion of capital.
The devastation that followed stemmed largely from
the tendency of accounting standards-setters and regulators to force banks,
by means of their litigation-shy auditors, to mark their illiquid assets
down to “unrealistic fire-sale prices,” the former FDIC chief asserted. The
fair-value rules “have destroyed hundreds of billions of dollars of capital
in our financial system, causing lending capacity to be diminished by ten
times that amount,” he said in his prepared remarks.
Noting that 157 was issued in 2006, Isaac noted
that he wasn’t “asking that we change the whole system of accounting that
has been developed for centuries.” Instead, he said, “I’m asking for a very
bad rule to be suspended until we can think about this more and stop
destroying so much capital in our financial system. I think that’s a basic
step that needs to be taken immediately.”
Isaac added that it’s his “fervent hope that the
SEC will recommend in its report to Congress that we abandon mark-to-market
accounting altogether.” The panel was held as part of the commission’s
effort to comply with a requirement in the Emergency Economic Stabilization
Act signed earlier this month that the SEC complete a study of
mark-to-market’s role in the current crisis by Jan. 2, 2009.
A new academic study finds that fair value
accounting was unfairly blamed for precipitating the 2008-2009 financial
crisis, but acknowledges that some investors reacted positively to news that
the rules would be relaxed in response to the crisis.
In the wake of the crisis, Congress convened
hearings to examine the impact of mark-to-market accounting and fair value
measurement on the shares of investment banks such as Bear Stearns, Lehman
Brothers and Merrill Lynch that had difficulty valuing mortgage-based
securities in illiquid markets, pressuring the Financial Accounting
Standards Board to relax the requirements for writing down the value of such
securities. One of the provisions of the economic stimulus legislation, the
Emergency Economic Stabilization Act of 2008, was to require the Securities
and Exchange Commission to release a report in December 2008 to examine the
role of mark-to-market accounting. The SEC study largely defended the role
of mark-to-market and fair value accounting, but also provided some
recommendations for revising the standards, which FASB and the International
Accounting Standards Board quickly began to do.
Now a new academic study by researchers at Columbia
Business School also examines the role of fair value accounting in the
financial crisis. The study, published in the Journal of Accounting and
Public Policy, examines FVA’s role in the financial crisis and considers the
advantages it offers relative to other methods of accounting.
“Fair value accounting has been blamed for the near
collapse of the U.S. banking system,” said Urooj Khan, assistant professor
of accounting at Columbia Business School and co-author of the research. “On
one hand, FVA can provide timely and relevant information during crisis, but
it can feel like ripping off a Band-Aid causing immediate pain as it
accelerates the process of price adjustment and resource reallocation in
times of financial turmoil. On the other hand, it can increase contagion
among banks by potentially fueling fire sales. Our research demonstrates
that investors’ concerns about FVA’s detrimental affect overshadowed the
beneficial role it plays in promoting timely market information.”
The study, titled “Market reactions to policy
deliberations on fair value accounting and impairment rules during the
financial crisis of 2008-2009,” was co-authored by Professor Urooj Khan of
Columbia Business School and Professor Robert M. Bowen of the University of
San Diego’s School of Business Administration and the University of
Washington’s Foster School of Business. The researchers explored stock
market investors' and creditors' reactions to events such as policy
deliberations, recommendations and decisions related to the relaxation of
FVA rules during a period of extreme financial turmoil from September 2008
to April 2009.
The research found that while news about relaxing
FVA rules generally led to positive stock market reactions, the results
varied depending on a variety of bank characteristics. The research also
revealed additional points that call into question FVA’s role in the recent
financial crisis.
Investors acted as if FVA rules harmed banks and
accelerated their decline, resulting in a favorable reaction to discussions
about relaxing FVA rules, the study noted. The researchers found some
evidence that banks that were more susceptible to contagion are the ones
that benefited the most from the change in FVA rules. For banks without
analyst coverage, investor reactions to relaxed FVA rules were less
positive, suggesting that, in the absence of other information sources,
investors perceive FVA data as providing timely and informative disclosures
about banks’ financial soundness. Banks with a higher proportion of illiquid
assets saw a more positive stock price reaction to potential relaxation of
FVA rules.
For the study, Khan and Bowen examined investor and
creditor reactions to 10 events—including policymaker deliberations,
recommendations, and decisions—related to the relaxation of FVA and
impairment rules in the banking industry.
To complement the event analysis, the study also
investigated cross-sectional stock price reactions to bank-specific factors
that potentially contributed to the financial crisis’ spread. Factors
analyzed included whether banks were well capitalized, their proportion of
fair value assets, and the availability of information sources other than
FVA data.
Continued in article
Jensen Comment
At the time in 2008 I wrote that Bill Isaac was an ignorant advocate of horrible and
dangerous bank accounting ---
"Don't Blame Fair Value Accounting Standards (except in terms of executive
bonus payments): This includes a bull crap case based on an article by the
former head of the FDIC," Bob Jensen, 2008 ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue
Isaac blamed the subprime collapse of thousands of banks on the FASB
requirements for fair value accounting (totally dumb) ---
http://www.trinity.edu/rjensen/2008bailout.htm#FairValue
Last night CNBC premiered their newest documentary
entitled Amazon Rising. I tuned in, as I have thoroughly enjoyed most of
their previous productions. I found this one to have a noticeably
anti-Amazon vibe, but none of the revelations about the company’s business
practices should have surprised many people, or struck them as having
“crossed the line.” For me, by far the most annoying aspect of the one-hour
show was the continued insistence that Amazon “barely makes any money” and
“trades profits for success.” It’s a shame that the media continues to run
with this theme (or at least not correct it), even when the numbers don’t
support it.
Most savvy business reporters understand the
difference between accounting earnings and cash flow, the latter being the
more relevent metric for profitability, as it measures the amount of actual
cash you have made running your business. There are numerous accounting
rules that can increase or decrease the income you report on your tax
return, but have no impact on the cash you have collected from your
customers. A good example would be your own personal tax return. Did the
taxable income you reported on your 2013 tax return exactly match the dollar
amount of compensation that was deposited into your bank account during the
year? Almost by definition the answer is “no” given that various tax
deductions impact the income you report and therefore the taxes you pay. But
for you personally, the cash you received (either on a net or gross basis)
is really all that matters. One can try to minimize their tax bill (legally,
of course) by learning about every single deduction that may apply to them,
but it doesn’t change the amount of pre-tax cash they actually collected.
As a result, the relevent metric for Amazon (or any
other company) when measuring profitability should be operating cash flow.
It’s fancy term that simply means the amount of actual net cash generated
(in this case “generated” means inflows less outflows, not simply inflows)
by your business operations. In the chart below I have calculated operating
cash flow margins (actual net cash profit divided by revenue) for five large
retailing companies — Costco, Walgreen, Target, Wal-Mart, and Amazon —
during the past 12 months. The media would have you belive that Amazon would
lag on this metric, despite the cognitive dissonance that would result if
you stopped to think about how Amazon has been able to grow as fast as they
have and enter new product areas so aggressively. After all, if they don’t
make any money, where have the billions of dollars required for these
ventures come from? The answer, of course, is that Amazon is actually quite
profitable.
Continued in article
Jensen Comment
It is important to when analyzing financial statements to carefully study cash
flows, especially when otherwise profitable companies are having worrisome cash
flow problems such as when customers are slow paying what is owed to a vendor.
But to imply that accrual profits are mostly irrelevant is irresponsible ---
something we should never teach our students.
Airline companies would look amazingly profitable if by some magic they never
had to replace their aircraft. Think of how profitable a railroad could be if
its rolling stock and road beds remained as good as new for 100 years of heavy
use.
Companies could pay employees in long-term stock options and look amazingly
profitable because the cash compensation is deferred for a very long time ---
sort of like cash payments for pensions that are way off in the distant future
for companies like Google and Amazon --- amounts owing when current managements
are long gone and eating on the lotus leaves.
Executives would do cartwheels if you paid their bonuses on operating cash
flow at Amazon.
Operating cash flow "profits" are the ultimate in
profit myopia.
The author must've never heard the phrase "eating your seed corn."
The author perhaps does not understand the moral hazards of basing
investments and management performance rewards on operating cash flows.
Bob Jensen's threads on cash flow profits versus accrual profits are at
http://www.trinity.edu/rjensen/Theory02.htm#CashVsAccrualAcctg
"Stakeholder Demand for Accounting Quality and Economic Usefulness of
Accounting in U.S. Private Firms," by Ole-Kristian Hope, Wayne B. Thomas,
and Dushyantkumar Vyas, SSRN, June 23, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457956
Abstract:
For some privately-held firms, the costs of providing high-quality
accrual-based financial statements may outweigh the benefits of
accommodating the demands of their stakeholders who may rely more on cash
flows or have direct access to management. For other private firms, greater
stakeholder demand for their financial information necessitates them
providing higher-quality accounting. Consistent with these expectations and
using a large sample of U.S. private firms, we find that accrual quality
increases with the demand for monitoring by equity investors, lenders, and
suppliers. We also find that ex-ante litigation risk relates positively to
accrual quality (a supply factor). Additional tests confirm that accrual
quality in private firms is associated with the ability of accruals to
predict future cash flows and with the quality of investment decisions.
Overall, our evidence suggests that accrual quality of private U.S. firms is
useful, has economic consequences, and varies predictably with certain firm
characteristics.
Abstract
The vast majority of students in accounting doctoral programs ultimately
hope to find a tenure-track faculty position upon graduation. However, it
has been our experience that many candidates pursue this goal with an
incomplete understanding of many aspects of the market, including how the
market clears, job expectations, and other issues that we believe are
important for graduates to understand in order to have a successful start to
their careers. Further, while other authors have adequately addressed the
importance of research in the profession and allude to some aspects of the
market, we provide additional useful information about the market and other
career aspects in order to assist both new graduates and relocating
professors in their quests to find fulfilling appointments. Our paper is not
meant to be a comprehensive guide covering all aspects of the market and
duties as a new professor; rather, we seek to complement existing literature
to form a more complete picture of the market and profession.
After taking its time to assess the state of XBRL
compliance and start calling for needed corrections, the Securities and
Exchange Commission has issued some new cautions regarding XBRL filings to
public companies: don't forget to provide your calculation relationships,
and particularly for smaller companies, reduce your use of custom tags.
The SEC's Division of Corporation Finance published
an open “Dear CFO” letter as a sample of correspondence sent directly to
certain public companies indicating they weren't including all the required
calculation relationships in their XBRL filings. “Acceptance of your filing
by EDGAR does not mean that your filing is complete or in compliance with
the commission's requirements,” the letter says. “We ask that you, in
preparing your required exhibit with XBRL data, take the necessary steps to
ensure that you are including all required calculation relationships.”
Calculation relationships in an XBRL filing explain
the additive or summation relationships between parent-child items in
financial statements. In the balance sheet, for example, calculation
relationships would show how current assets and noncurrent assets add up to
a total asset figure. The SEC's Dear CFO letter reminds companies to take a
look at the EDGAR Filer Manual for information on how to comply with the
requirement to provide calculation relationships in filings.
Separately, SEC staff also published observations
on custom tags, or extensions, that are used to express numbers that are not
readily found in the GAAP Taxonomy that all companies follow to tag their
financial data and disclosures. The SEC's Division of Economic and Risk
Analysis recently assessed the quality of XBRL exhibits from 2009 through
2013 and determined larger companies have reduced their use of custom tags,
making XBRL exhibits more directly comparable, but smaller companies have
not shown the same reduction.
Feedback on the question in my previous post could
take many directions. Around the same time that Elliott wrote about the 3rd
wave many authors were advocating various approaches to help U.S. companies
become competitive. Deming and Goldratt published books about the problem in
1986 and followed that with other books adding more specificity. CAM-I
published its conceptual design (edited by Berliner and Brimson) in 1988 and
numerous authors (e.g., McNair) have written about activity-based cost
management since that time. In 1990 Senge wrote about systems thinking (The
Fifth Discipline) and Hammer introduced the concept of Reengineering
adding more depth and specificity in Reengineering the Corporation
with Champy in 1993. In 1996 Womack and Jones published Lean Thinking
with recommendations similar to Imai's approach in his 1986 Kaizen.
More recently Johnson and Broms wrote about the living systems model (in
Profit Beyond Measure) and Baggaley and Maskell have described
value-stream management. I have developed a considerable amount of
information about the first three approaches, some information about
approaches 5, 6, and 7, but very little about 4th approach Reengineering. To
consider the Reengineering approach see my summary of Hammers' 1990 paper
(Hammer, M. 1990. Reengineering work: Don't automate, obliterate. Harvard
Business Review (July-August): 104-112. ) at
http://maaw.info/ArticleSummaries/ArtSumHammer1990.htm
My current view is that reengineering should be the
first step after one embraces systems thinking and then it can be followed
by other approaches. This is because approaches such as continuous
improvement (TOC, PDCA, etc.), and value-stream management should not be
used on process designs that companies should not be doing in the first
place.
1. The systems thinking (Deming 1986, 1993, Senge 1990) approach.
2. The theory of constraints (Goldratt 1986, 1990) approach.
3. The activity-based cost management (CAM-I 1988, McNair 1990, etc.)
approach.
4. The reengineering (Hammer and Champy 1990, 1993) approach.
5. The self-organizing lean enterprise, including just-in-time (Womack and
Jones 1996, Imai 1986) approach.
6. The living systems model (Johnson and Broms 2000) approach.
7. The value-stream management (Baggaley and Maskell 2003) approach.
Abstract
Understanding and measuring accounting disclosure complexity is important
because increased accounting disclosure complexity can lead to poor
financial reporting. However, to date, the measurement of accounting
disclosure complexity remains elusive. Using eXtensible Business Reporting
Language (XBRL) filings, we propose two measures of accounting disclosure
complexity. The first is based on the number of US GAAP XBRL Taxonomy tags
reported in company filings. This variable is based on the premise that a
higher volume of reported accounting concepts captures greater disclosure
complexity. The second is based on the number of customized (extensions)
XBRL tags that are created by companies when the Taxonomy does not include
suitable tags to represent company-specific accounting concepts. This
measure captures the volume of unique, and therefore difficult, aspects of
accounting concepts. We validate these measures by showing that greater
accounting disclosure complexity is associated with poor financial reporting
quality. Specifically, we find that these two accounting disclosure
complexity measures are positively associated with likelihood of issuing
financial statement restatements, disclosing material weaknesses in the
internal controls over financial reporting, and reporting higher abnormal
accruals. Further, these complexity proxies are positively associated with
higher audit fees that we use to proxy for the level of auditor
effort/risk-adjustment. These measures are distinct from proxies for
operating complexity and financial reports readability, and exhibit more
consistent association with measures of poor financial reporting quality. We
suggest that these measures can be used by companies when deciding on
internal resource allocation to the accounting function or by external
stakeholders who wish to assess financial reporting risk.
Abstract
The objective of this note is to caution against expecting golden eggs from
a normal goose. It's probably easier for those who have not actually
conducted behavioral research to build high expectations for its policy use
and implications simply because it appears the obvious way to do ex ante
research, i.e., prior to making the final standards. Behavioral research
methods have their own promises as well as weaknesses. The message I intend
to emphasize in this note is the need for triangulation in research; that
is, multiplicity of research methods of which behavioral methods are only a
component. Furthermore, almost by necessity, policy relevant research is one
that generates concordant findings simply because policies and standards
generate their own strength from being generally acceptable.
Abstract
During the period 1995-2012, the USA has captured a large proportion of both
invention and growth in financial derivatives. The notional amount of total
derivatives held by U.S. bank holding companies has grown from 16.6 trillion
in 1995 to 308 trillion in 2012, while the U.S. GDP has slightly more than
doubled from 7.7 trillion to 16.2 trillion over the same period. In this
paper, we consider three potential drivers of this growth: (a) the
Gramm-Leach-Bliley Act of 1999 that repealed the Glass-Steagall Act; (b) the
Commodity Futures Modernization Act of 2000 that sanctioned gambling in
securities by preempting all anti- bucket shop laws; and (c) the FAS 133
Accounting for Derivative Instruments and Hedging Activities which was
issued in 1998 and became effective in 2000. The results are consistent with
two expectations: (i) the enactment of the two Congressional Acts was a
motivating factor in the growth of trading derivatives (which amounted to
98% of the total derivatives), and (ii) adoption of hedge accounting was a
contributor to growth in non-trading derivatives.
Abstract
Current standards define fair value as the market price at which an asset
could be sold or a liability could be settled in the normal course of
business. Setting aside measurement issues, assessing the relevance of exit
values has intensified in recent years as fair value becomes a pervasive
component of accounting regulation. The current debate about accounting
measurement is framed in terms of making a choice between fair value and
historical cost. In this article I argue that this is not a correct framing
of the issues; knowledge of fair value alone cannot help investors to
evaluate stewardship, because they would not know how much resources the
management had sacrificed to obtain that fair value. To properly evaluate
stewardship, investors need both types of information, historical cost and
fair value. Using this information, a rate-of-return-like index of
stewardship quality is proposed. This commentary concludes with a statement
about three significant drawbacks of relying solely on fair value
accounting.
Abstract
This case study discusses accounting and auditing implications resulting
from the dispute among auditors and the management of Maridive & Oil
Services Company (MOS) in the preparation of the company’s financial
statements at December 31, 2008. The dispute occurred for the accounting
treatment of losses of $ 18 million dollars expected to be realized on the
swap agreement made between MOS and a number of international banks during
the period 2009-2018. MOS is a publicly traded company at both Cairo and
Alexandria Stock exchanges, with total assets of more than $390 million
dollars. The company entered into swap agreement with two international
banks to minimize the risk associated with credit facilities received by the
company to expand its marine services through the construction of a number
of marine vessels. The dispute among the three international audit firms
resulted in the issuance of two different sets of audit reports.
The Egyptian Capital Market Authority (CMA)
examined the company’s financial statements for the year ended on December
31, 2008, while the auditors’ reports forced the company’s management,
despite the objection of two of the company’s auditors, to restate its
financial statements at December 31, 2008, and modify its profit
appropriation statement after their publication to shareholders and the
public. The research presents the problems related to the application of the
International Accounting Standards no 32 and 38 “Financial assets and
Derivatives,” their Egyptian equivalents, and the Egyptian Standards on
auditing no 700 and 702. Further, the research identifies the differences
associated with auditors issuing contradictory audit reports for a company’s
single set of financial statements.
Abstract
In the 1990’s and early 2000’s the tax landscape in the United States was
overrun by an epidemic of tax shelters that was unprecedented. The shelters
were designed and sold by seemingly reputable large accounting and law
firms. The same shelters were sold to many taxpayers. They became generic,
off-the-shelf, products. However, the tax shelters had no business
substance. The shelters were eventually found to be invalid by the courts.
In light of the invalidity of the shelters, the large fees paid for the
shelters and the large damages caused by participating in the invalid
shelters, there were predictions that many malpractice suits against the
sellers of the shelters would ensue.
For this article I attempted to determine whether
the predicted wave of tax malpractice suits occurred and what impact, if
any, resulted in the area of tax malpractice litigation.
Much to my surprise, there ended up being very few
cases focusing on substance. There were several class actions that were
settled but, in light of the settlements, offered no useful insights. Most
of the other reported cases dealt with procedural issues such as whether the
action must be arbitrated, federal versus state venue, statute of
limitations, etc. In the end, there were only a few cases that addressed any
issue of substance. The only exception was a huge case in Kentucky, Yung v.
Grant Thornton LLP , that was decided in late November, 2013. The case was
huge because of its length (over 200 pages) and because it awarded $20
million in compensatory damages and $80 million in punitive damages.
In the article I analyze the few existing generic
tax shelter cases and try to fit them into the general principles governing
tax malpractice. I then also review the other developments in the tax
malpractice area during approximately the last decade.
Jensen Comment
The above article focuses on income taxation. However, over the years we've come
to expect mark-to-market revaluations of real estate property for purposes of
computing property taxes. It is not at all uncommon for retired folks to have to
sell their long-time homes because they can no longer keep up with property tax
increases caused by mark-to-market adjustments of the base.
This was the main reason why California years ago voted in Proposition 13
banning mark-to-market adjustments that were particularly troublesome to home
owners in the insanely hot real estate market of most parts of California ---
http://en.wikipedia.org/wiki/Proposition_13
Home owners in other states have not been given such serious mark-to-market
relief. If investors had to additionally pay annual income taxes on unrealized
fair value gains in their savings portfolios it would compound the felony.
A very concise summary of the positions of various accounting theory
experts in history since 1909 and authoritative bodies over the years since
1936:
"Asset valuation: An historical perspective"
Authors: Racliffe, Thomas A. (Thomas Arthur) and Munter, Paul Accounting Historians Journal
1980
http://umiss.lib.olemiss.edu:82/record=b1000230
Jensen Comment: I really liked this summary of the valuation
literature prior to 1980.
For example, what was the main difference between exit
value advocates Chambers versus Sterling?
The paper investigates the Bonsignori accounts
that are in the archives of the University of Kansas, Spencer Research
Library. The file contains 133 documents and bound books relating to the
affairs of the Filippo Bonsignori family between 1455 and 1632. The most
important documents deal with, accounting and administration of Filippo
Bonsignori's will. The time period involved (1455 to 1632) permits some
study of the developments in accounting methods used in fulfilling fiduciary
responsibilities. The paper provides insight into the history of Florentine
estate accounting. Bonsignori family estate accounting 1461-1632
Author : Var, Turgut Accounting Historians Journal
http://130.74.92.202:82/articles/1000256.327/1.PDF
Distinct parallels exist between the historical
evolution of scientific disciplines, as explained in Thomas Kuhn’s The
Structure of Scientific Revolutions, and the historical evolution of the
accounting discipline. These parallels become apparent when accounting’s
dominant paradigm is interpreted to be the double-entry bookkeeping model.
Following this interpretation, the extensive articulation of the
double-entry model over the past four centuries may be seen to closely
resemble the “normal science” of Kuhn’s theory. Further parallels become
apparent when Kuhn’s concept of the disciplinary crises that precede
scientific revolutions is compared to developments in the accounting
discipline over the past 25 years. This portrayal of accounting’s evolution
suggests an uncertain future for the accounting discipline.
"Kuhnian interpretation of the historical evolution of accounting"
Author: Cushing, Barry E. Accounting Historians Journal
http://130.74.92.202:82/articles/1000541.902/1.PDF
Also see
http://130.74.92.202:82/articles/1026390.3078/1.PDF
Jensen Comment: Years ago Barry was one of my doctoral students. He's
best known for authoring one of the first AIS textbooks.
Developments in accounting methodology during
the 1960s are contrasted with concurrent developments in philosophy of
science. The 1960s was a decade characterized by the widespread adoption of
“the scientific method” in accounting methodology. The same decade was
characterized by the degeneration of any semblance of consensus among
philosophers of science regarding the nature of scientific inquiry. The
irony of these incongruous but simultaneous developments is highlighted with
the intent of weakening the current atmosphere of uncritical reverence for
science and “the scientific method” in accounting research. A more
contemporary (and more open) view of science — the postempiri-cist view —
also is discussed. "Irony of the golden age of accounting methodology"
Author: Mouck, Tom Accounting Historians Journal
1989
I have often been asked by accountants who not
only take a deep interest in their profession as it is practiced to-day, but
love to hear something of its distant past, to write an account of the early
days of the profession in this country, its beginning over forty years ago,
the quality and character of the men connected with it, the nature and
extent of the work they did, and of course any odd or interesting personal
experiences I met with during that early period. 'This request has been made
of me I presume because I am supposed to be the oldest practicing accountant
in the States, practicing I mean in a public capacity. On this point,
however, I cannot make any positive statement. I have, therefore, written
this account rather "by request" than for any other purpose, and I trust it
may be of interest to some readers and probably in certain respects
instructive.
"Recollections of the early days of American accountancy, 1883-1893"
Author: Anyon, James T. Accounting Historians Journal
1925
http://130.74.92.202:82/articles/1035536.4412/1.PDF
Board of directors' audit committees are
becoming an increasingly popular vehicle for enhancing the objectivity and
independence of auditors and overseeing the financial information generating
process. This is occurring at a time when directors and auditors are facing
criticism and increased litigation due to corporate failures and disclosures
of illegal or questionable payments. This article examines the workings of a
corporate audit committee that operated in the mid-nineteenth century. The
committee functioned as "auditor" for the company since there was no
established public accounting profession in the U.S. at that time. They
disentangled the financial affairs of the company and probably directly
contributed to the replacement of the President of the company. Although the
activities of corporate audit committees have changed or evolved
considerably through the years, both the 1870 corporate audit committee and
modern corporate audit committees have pursued a common goal of achieving
accuracy and completeness in corporate financial reports.
"1870 corporate audit committee"
Author: McKee, Thomas E Accounting Historians Journal
1979
http://130.74.92.202:82/articles/1000221.248/1.PDF
The history of LIFO illustrates the interplay
of taxes and the general acceptance of accounting principles. In this paper,
the gradual acceptance of LIFO in the United States is traced. The study
focuses on both the theoretical evolution of LIFO and its acceptance by
taxing authorities and accountants.
"History of LIFO"
Davis, Harry Zvi Accounting Historians Journal
1982
http://130.74.92.202:82/articles/1000275.365/1.PDF
Early SEC filings for 110 corporations listed
on the New York Stock Exchange are used to summarize the extent and
accounting treatment of asset revaluations during the period 1925-1934. The
findings, considered with a brief review of the relevant contemporary
accounting literature, lead to the conclusion that the popular conception of
extensive and misleading revaluations is generally unsupported.
Significantly, no firm in the sample increased reported earnings during the
period 1925-1929 as a result of asset revaluations. Corporate asset revaluations: 1925-1934
Author : Dillon, Gadis James Accounting Historians Journal
http://umiss.lib.olemiss.edu:82/articles/1000201.211/1.PDF
Ball State University will hire a former federal
prosecutor to investigate
how it was defrauded of $13.1-million, The
Star Press reports. Deborah Daniels, an
Indianapolis lawyer and former U.S. assistant attorney general, will also
recommend ways for the university to better protect itself from fraud.
The university fell victim to the vast fraud
because of two investments made by a former director of cash and
investments, Gale Prizevoits, whom Ball State fired in 2011. Two men have
been convicted and sentenced to time in federal prison for defrauding the
university of $8-million and $5-million, respectively.
Jensen Comment
This is a short illustration of neglect in the most basic internal controls.
New accounting rules approved by FASB on Wednesday
are designed to make financial reporting about consolidation more
transparent and consistent.
FASB will issue the standard in the coming months,
following the drafting of the final Accounting Standards Update (ASU).
All public and private companies that apply
variable-interest entity (VIE) guidance will be affected by the ASU, as will
limited partnerships and similar legal organizations such as limited
liability corporations.
The new rules are intended to be less complex for
limited partnerships and similar legal organizations. In addition, the rules
are designed to simplify the consolidation guidance to focus more on
principal risk, and remove the indefinite deferral available to certain
investment funds.
The ASU will:
Change requirements for when a general partner
consolidates a limited partnership.
Clarify when fees paid to a decision-maker
(such as an asset manager) should be considered for VIEs when evaluating
if a decision-maker is required to consolidate the VIE.
Reduce the complexity of the guidance for VIEs
as it applies to related-party relationships such as affiliates.
Exclude certain money market funds from the
guidance’s scope.
FASB published proposals Tuesday that are
designed to simplify the measurement of inventory and eliminate the concept
of extraordinary items.
The proposals are part of FASB’s
simplification initiative, which is designed to reduce cost and complexity
in financial reporting while improving or maintaining the usefulness of
information to users through narrow-scope projects that could simplify GAAP
in a short period.
In the proposal titled Inventory
(Topic 330): Simplifying the Measurement of Inventory,
FASB proposes measuring inventory at the lower of
cost or net realizable value. Current GAAP requires reporting organizations
to measure inventory at the lower of cost or market, where market could be
net realizable value, replacement cost, or net realizable value less a
normal profit margin when measuring inventory.
The proposal is designed to reduce
complexity by narrowing the possibilities for measurement. The proposal
would eliminate existing requirements to consider the replacement cost of
inventory and the net realizable value of inventory less an approximately
normal profit margin.
The
other proposal, Income Statement–Extraordinary
and Unusual Items (Subtopic 225-20): Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items, seeks
to lower cost and complexity by eliminating the concept of extraordinary
items.
Under current GAAP, organizations are
required to evaluate whether an event or transaction is an extraordinary
item. If deemed extraordinary, the item is required to be separately
presented and disclosed.
But, according to FASB, uncertainty arises
in the determination of whether items are extraordinary, because it is
unclear when an item should be considered both unusual and infrequent. FASB
believes eliminating the concept would relieve preparers from the burden of
assessing whether events or transactions are extraordinary.
In addition, FASB intends to alleviate
uncertainty for preparers, auditors, and regulators because it would no
longer be necessary for auditors and regulators to evaluate whether a
preparer presented an unusual and/or infrequent item appropriately.
FASB expects that both proposals, if
approved, would be applied prospectively in annual periods, and interim
periods within those annual periods, beginning after Dec. 15, 2015. Early
adoption would be permitted.
Abstract:
Over the past decade, the Big 4 public accounting firms have steadily
increased the proportion of their revenue generated from consulting services
(consulting revenue hereafter), primarily from nonaudit clients. Regulators
and investors have expressed concerns about the potential implications of
accounting firms’ expansion of consulting services on audit quality. We
examine the associations between Big 4 audit firm consulting revenue and
various measures of audit quality, including auditor going concern reporting
errors, client misstatements, and client probability of meeting or just
beating analyst earnings forecasts. Overall, our results suggest that a
higher proportion of firm-level consulting revenue is not associated with
impaired audit quality for the Big 4 firms. However, results of earnings
response coefficient tests suggest that investors perceive a deterioration
of audit quality when a higher proportion of the firms’ revenue is generated
by consulting services.
Public company and bank audits conducted around the
globe by units affiliated with the world’s six largest accounting firms are
persistently riddled with flaws, a group of international regulators have
found.
The finding, released on Thursday in the results of
a survey conducted in 2013 by the International
Forum of Independent Audit Regulators, raises major policy questions about
whether global regulators have done enough to improve audit quality since
the 2007-9 financial crisis.
Leading up to the crisis, many publicly traded banks
portrayed a rosy financial picture of their corporate books, only to suffer
huge losses later on subprime mortgage securities in their portfolios.
Critics have questioned why independent auditors
responsible for reviewing the accuracy and quality of public company
financial reporting failed to spot the problems sooner.
“The high rate and severity of inspection deficiencies
in critical aspects of the audit, and at some of the world’s largest and
systemically important financial institutions, is a wake-up call,” said
Lewis H. Ferguson, a board member of the Public Company Accounting Oversight
Board, which polices auditors in the United States.
“More must be done to improve the reliability of audit
work performed globally on behalf of investors,” he said.
The findings discussed Thursday stem primarily from
inspections conducted at firms affiliated with the six largest accounting
firms. They include the Big Four — PricewaterhouseCoopers, KPMG, Deloitte
and Ernst & Young — as well as BDO and Grant Thornton.
The survey looked at inspection results for audits of
public companies and large financial institutions considered “systemically
important” to the global economy.
With public company audits, regulators found problems
related to auditing fair value measurements, internal control testing and
procedures used to assess how financial statements are presented.
The regulators also said that audits of systemically
important financial firms often had deficiencies stemming from allowances
for loan losses and loan impairments, and the auditing of investment
valuation.
Cindy Fornelli, executive director at the Center for
Audit Quality, said on Thursday in reaction to the survey that her group’s
members recognized there was still “work to do.”
At the same time, she noted that accounting reforms
enacted in the United States in 2002 “have led to improvements in audit
quality, financial reporting, and internal controls over financial
reporting.”
Continued in article
Jensen Comment
Given the repeated deficiencies in Big Four audits as reported in PCAOB
inspection reports year after year perhaps cost cutting is more of a problem in
Big 4 audit professionalism than independence. In some cases the Big Four firms
are flagged for poor audit supervision of inexperienced staff auditors. In most
instances, however, the problem is one of failure to do enough detail testing.
Abstract
Recent research suggests that Big 4 auditors do not provide higher audit
quality than other auditors, after controlling for the endogenous choice of
auditor. We re-examine this issue using the incidence of accounting
restatements as a measure of audit quality. Using a propensity score
matching procedure similar to that used by recent research to control for
clients’ endogenous choice of auditor, we find that clients of Big 4 audit
firms are less likely to subsequently issue an accounting restatement than
are clients of other auditors. In additional tests, we find weak evidence
that clients of Big 4 auditors are less likely to issue accounting
restatements than are clients of Mid-tier auditors (Grant Thornton and BDO
Seidman). Taken together, the evidence suggests that Big 4 auditors do
perform higher quality audits.
Jensen Comment
Audit restatements, in my opinion, are lousy surrogates for audit quality.
Restatements can, and often do, arise when the audits are outstanding because
there are many factors leading to restatements that may not be picked up in the
best of audits. On the other hand, audits not accompanied by restatements may be
horrible audits. In fact, audit firms may be inclined to cut corners in audit
firms that they believe are likely to be in close conformance to GAAP and are in
great financial shape. Such positive incentives for cutting corners in audits
does not justify cutting corners in my opinion --- and in the opinion of the
PCAOB that are repeatedly finds audit deficiencies by Big 4 firm audits of
clients that did not later issue restatements.
Abstract
Accounting standards require disclosure of estimable losses from
contingent liabilities such as litigation expenses. However,
revelation of the firm’s private estimates of the probability of
loss and possible legal damages can be detrimental to the firm
by encouraging litigation and increasing the costs of
settlement. In this paper, I propose a model (the US-patented
TMTM) that uses publicly-available data to provide accurate and
unbiased estimates of litigation damages without requiring firms
to publicly disclose their private assessments or litigation
reserves. This provides valuable information to the users of
financial statements without undermining the firm’s right to
preserve sensitive internal information.
From KPMG University Connection on July 14, 2014 11 New Audit Teaching Cases
Company Risk, Governance, and Accounting Policy Cases
Developed by Brian Ballou, Ph.D., CPA,
and Dan L. Heitger, Ph.D., Miami University
SUMMARY: Two funds traded on the NYSE, Blackstone Group and Och-Ziff
Capital Management Group, as well as Cerberus Capital Management LP, have
been able to buy Italian properties that other foreign investors are unable
to acquire "due to the slow pace of sales." The properties are being sold by
financially stressed governments and institutions; they "are occupied by
barracks, police stations, ministries and other government offices...."
These U.S. based funds are making acquisitions from two Italian funds "owned
by Italian banks and institutional investors" which "were set up by the
Italian government in 2004 to do sale-leasebacks of government-owned
property." Two times in the article the similarities between leases are
bonds are mentioned. Discussion questions focus on understanding
sale-leaseback transactions and the similarity to bonds in the annuity
stream that follows.
CLASSROOM APPLICATION: The article may be used in a financial
reporting class when covering leasing. Even when not planning to cover
accounting for sale-leaseback transactions, it is useful for students to
know of the existence of these transactions.
QUESTIONS:
1. (Advanced) What are sale-leaseback transactions? Cite your
source for this definition if it comes from a source other than this
article.
2. (Introductory) Why does the Italian government need to sell its
properties that it owns and occupies if it does not plan to remove
operations from them?
3. (Advanced) How do terms of sale-leaseback transactions make the
transactions like bonds, that is, more "financial operations...than classic
real-estate operations"?
4. (Advanced) Describe how leases are priced for accounting
purposes. In your answer, point out the similarities to and differences from
pricing of bonds.
Reviewed By: Judy Beckman, University of Rhode Island
Many foreign investors that have shown up in Italy
to buy property from financially stressed governments and institutions have
been discouraged by the slow pace of sales.
But there is a recent exception to this rule: Deals
have begun to flow out of two funds that were set up by the Italian
government in 2004 to do sale-leasebacks of government-owned property.
Blackstone Group BX -0.84% LP, Cerberus Capital
Management, LP, and Och-Ziff Capital Management Group OZM -0.81% are buying
properties from these funds that are occupied by barracks, police stations,
ministries and other government offices, according to people familiar with
the matter. The total value of three deals expected to close this summer is
over €600 million ($816 million), people said.
The two 10-year-old funds are owned by Italian
banks and institutional investors. One of them—Fondo Immobili Pubblici,
managed by Investire Immobiliare SGR SpA—purchased €3.7 billion of
government-occupied properties and leased them back to the government. The
other—Patrimonio Uno, managed by BNP Paribas Real Estate—purchased and
leased back €700 million of buildings.
Together, the funds own hundreds of properties. The
recent sales won't make a dent in Italy's public debt of over €2 trillion
because the funds aren't owned by the government. But the deals are a sign
that the slow recovery of the European economy is increasing demand for
Italian property.
More deals are expected. Fondo Immobili Pubblici is
scheduled to liquidate by December 2019, with a possible extension to 2022.
Patrimonio Uno is scheduled to liquidate by December 2017, with a possible
extension to 2020.
Sale-leasebacks are popular with investors because
they offer a guaranteed steady rent stream as long as the leases last. The
Italian state leases over 11,000 properties and pays €1.25 billion annually
in rents, according to data from Agenzia del Demanio, the agency that
manages the state's real-estate assets.
Lately, many sale-leaseback deals with the Italian
government have taken on a new level of risk. Under recent laws passed in
the wake of the financial crisis, the government has given itself rights to
cut its rents by 15%, and to break a lease without notification to
landlords.
"Investors are skeptical of properties rented to
the public administration," said Carlo Vanini, a partner for capital markets
at Cushman & Wakefield Inc. He recently had a deal for a portfolio of office
buildings in Rome fall through because the tenant, an Italian ministry,
broke its lease unexpectedly.
But sales by the two funds are expected to attract
a lot of investor interest because they were set up with specific
regulations by the Italian Ministry of Finance. As a result, the property
they own aren't subject to the new laws that give the government the ability
to get out of leases or cut rents.
Overall, commercial real-estate sales volume in
Italy has been increasing as the euro zone has recovered from the financial
crisis. CBRE Group Inc. predicts that there will be about €5 billion in
Italian commercial-property sales in 2014, compared with €4.6 billion in
2013.
Blackstone was one of the most-active buyers of
Italian real estate in the first quarter of 2014, with acquisitions of a
portfolio of logistics warehouses and another portfolio of office and retail
assets.
Now, Blackstone is in exclusive talks to buy a
Fondo Immobili Pubblici portfolio of nine office buildings for €240 million,
according to people familiar with the matter. The portfolio includes offices
of the Italian Revenue Services and of the Ministry of Finance in the
Northern cities of Turin and Pavia.
Fondo Immobili Pubblici also has selected Och-Ziff
as exclusive bidder for three complexes of office buildings and barracks
occupied by the Italian financial police with an initial offer of €290
million, according to people familiar with the matter. One of the complexes
in the southern city of L'Aquila was where a G-8 summit took place in 2009.
Mr. Vanini compared these assets to bonds because
the rent payments guarantee a secure cash flow. "They are financial
operations more than classic real-estate operations," he said.
According to people familiar with the deals, yields
are approximately 7% for the office buildings and over 10% for the barracks,
mostly located in Southern Italy.
In another deal involving state-rented properties,
Cerberus is expected to close soon on the purchase of seven police barracks
across Italy owned by Patrimonio Uno. It is expected to pay €90 million for
properties that will guarantee yields up to 12%, according to people
familiar with the deal.
SUMMARY: This article describes fiscal second quarter results for
Cisco Systems. The company reported a charge of $655 million to repair
faulty chips. The press release is available at
http://www.sec.gov/Archives/edgar/data/858877/000119312514048150/d675402dex991.htm
In it, the company reports non-GAAP results which exclude this charge.
CLASSROOM APPLICATION: The article may be used to discuss
contingent liabilities, quarterly reporting requirements resulting in the
charge for defective chip repairs in one quarter, and non-GAAP reporting
issues in financial accounting classes. The managerial accounting topic of
quality cost also is covered. This product-related issue might be compared
to coverage of Target's woes covered under another article in this review
QUESTIONS:
1. (Introductory) Define the term contingent liability.
2. (Advanced) Based on the description in the article, is the "$655
million charge to cover the costs of addressing the memory-chip problem" a
contingent liability? Support your answer.
3. (Advanced) Access the Cisco press release of its fiscal second
quarter results for the period ended January 25, 2014, filed with the SEC on
February 12, 2014, and available at
http://www.sec.gov/Archives/edgar/data/858877/000119312514048150/d675402dex991.htm
Refer to the statement that "GAAP net income for the second quarter of
fiscal 2014 included a pre-tax charge of $655 million related to the
expected cost of remediation of issues with memory components in certain
products sold in prior fiscal years." Why must the $655 million cost be
recorded in one quarter's financial statements when it relates to chips sold
in prior fiscal years? Identify all relevant areas of financial reporting
requirements that you consider in answering this question.
4. (Advanced) In its press release, Cisco says "this [$655 million]
charge was excluded from non-GAAP net income and earnings per share." Do you
agree this is a relevant treatment to identify the company's performance? In
your answer, include a brief definition of reporting non-GAAP results by
U.S. companies.
Reviewed By: Judy Beckman, University of Rhode Island
Cisco Systems Inc. CSCO -0.55% continues to face
sagging demand for some important products, a problem exacerbated in its
fiscal second quarter by some faulty memory chips.
The network-equipment giant on Wednesday reported a
55% drop in income for the quarter, blaming a $655 million charge to cover
the costs of addressing the memory-chip problem. Cisco's revenue declined
7.8%,
That's a bit better than its forecast in November
for an 8% to 10% revenue decline. Cisco predicted Thursday revenue would
decline an additional 6% to 8% in the current quarter.
Cisco's shares slid 4% in after-hours trading to
$21.94.
John Chambers, Cisco's chief executive, said the
company faces a slowdown in orders from emerging economies and "product
transition" issues, as customers hold up purchases to evaluate its latest
switching and routing equipment.
The company said switching revenue declined 12% in
the second quarter, while revenue from routers declined 11%.
Cisco faces stiff competition in those markets,
including new rivals that are attempting to shift some switching chores to
general-purpose server systems. Mr. Chambers said the company is actually
gaining market share in some segments of the switching market, and said
orders are picking up for its new products.
On another positive note, Mr. Chambers predicted
that a broad trend of connecting everyday products to the Internet—which
Cisco calls the Internet of Everything—would begin to impact its business
positively soon.
"The Internet of Everything has moved from an
interesting concept to a business imperative," Mr. Chambers said during a
conference call with analysts, predicting that 2014 will be an "inflection
point" for sales of such technologies.
But Bill Kreher, an analyst at Edward Jones, said
he sees stiffening competition and other issues making it tougher for Cisco
to return to growth in its current fiscal year. "There was some hope, but
now it appear that that's evaporating," he said.
The Silicon Valley company, which is seen as a
bellwether for corporate technology spending, in November reported a sharp
drop in orders in China, Brazil, Mexico, India and Russia. Cisco said the
picture improved somewhat in the second period, with aggregate orders from
such emerging economies declined 3%, compared with 12% in the first quarter.
Cisco, whose routers and switching gear funnel
traffic on corporate campuses and over the Internet, has also built up a
fast-growing line of servers. But the company signaled last year that it
expected business to slow and said it was moving to trim some 4,000 jobs, or
5% of its workforce.
For the period ended Jan. 25, Cisco reported a
profit of $1.43 billion, or 27 cents a share, down from $3.14 billion, or 59
cents a share, a year earlier. Excluding stock-based compensation,
acquisition-related costs and other items, adjusted profit slipped to 47
cents from 51 cents. Revenue dropped to $11.2 billion.
Analysts on that basis had expected per share
earnings of 46 cents on revenues of about $11 billion, according to Thomson
Reuters.
In the current quarter, Cisco predicted adjusted
earnings per share of 47 cents to 49 cents. Analysts had been expected 48
cents.
Cisco said the memory chips were used in a number
of products it sold to customers between 2005 and 2010, and were purchased
from a single supplier it didn't identify. The company said the majority of
the affected hardware is beyond Cisco's warranty terms, and failure rates
are low, but said Cisco is nevertheless working with customers to mitigate
the problem. A company spokesman declined to comment on whether Cisco would
get any compensation from the chip company.
The company on Wednesday boosted its quarterly
dividend to 19 cents a share, up two cents.
"By the end of approximately 2007, Villalobos had
made, and I had accepted, bribes totaling approximately $200,000 in cash,
all of which was delivered directly to me in the Hyatt Hotel in downtown
Sacramento across from the Capitol. Villalobos delivered the first two
payments of approximately $50,000 each in a paper bag, while the last
installment of approximately $100,000 was delivered in a shoebox."—Plea
Agreement, United States of America v. Fred Buenrostro, U.S. District Court,
Northern District of California, filed July 11, 2014.
The government official who pleaded guilty here,
Fred Buenrostro, wasn’t some city council member or state senator, but
rather, from December 2002 to May 2008, the CEO of the California Public
Employees Retirement System. Calpers, the largest public pension fund in the
country, managed assets of as much as $250 billion during that period.
The bribing of Buenrostro was part of a successful
effort by a New York money management firm (which claims it had no knowledge
of the bribe and has not been charged with any wrongdoing) to win $3 billion
in business managing pension money for California state employees and
retirees.
Crooked government officials come along often
enough that there’s a tendency to tune them out, but this case is worth
pausing to analyze further for a number of reasons.
For one thing, there’s the hypocrisy angle. Calpers
has been at the forefront of criticizing company boards for practices that
are not shareholder friendly. Sometimes it’s right about that, but even when
it is, it manages to come off as holier-than-thou. It doesn’t exactly add to
Calpers credibility denouncing board-management coziness at big publicly
traded companies when its own CEO is taking paper bags full of cash from a
representative of a contractor.
For another thing, Calpers isn’t the only big
public pension fund with a recent scandal. The New York State Comptroller,
Alan Hevesi, pleaded guilty in 2010 to a felony in connection with
corruption in managing the $125 billion fund that covers New York public
employees.
What I’ve called the state-pension-industrial
complex has deleterious effects on several levels.
The current system takes rich money managers, who
ordinarily might be a voice for lower taxes and restrained government
spending, and makes them beholden, for business, on public pension boards
that sometimes include union officials. Instead of arguing for less generous
pensions, or for personal accounts that employees would manage individually,
the money managers now have incentives to argue for more generous pensions
and to avoid upsetting the system that is enriching them.
And the current system takes public employees, who
if they had personal accounts might be able to invest in corporate stocks
and root for their success, and instead makes them reliant for their
retirement income on the same state government bureaucracy that now employs
them.
Naturally, it also breeds corruption. So much money
sitting in the hands of government officials is a temptation too strong to
resist. It is too strong for the money managers who want to get a piece of
it, and it is too strong for the government officials and their friends who
want some money or other benefits in exchange for helping the money managers
get a piece of it.
Let’s Gowex SA’s founder and his wife paid their
maid 300 euros ($405) to help him fake clients for the Wi-Fi hotspots
provider that was exposed this month as a fraud.
Chief Financial Officer Francisco Martinez escorted
Guillermina Almeida to a notary and several banks to sign papers creating at
least one company that purported to buy Gowex services, Almeida told Judge
Santiago Pedraz of Spain’s National Court today, according to a court
statement.
Florencia Mate introduced Almeida to Martinez,
according to the statement, which was read by an official who can’t be named
under court policy. Mate’s husband, Jenaro Garcia, founded Gowex and she
served as investor relations manager and on the company’s board. Mate has
also been called to answer questions before Pedraz.
Gowex’s market value reached as high as 1.9 billion
euros three months ago. The one-time darling of the Spanish tech community
-- which Garcia projected would provide free Wi-Fi to 20 percent of the
world population by 2018 -- started unraveling July 1, when short-seller
Gotham City Research LLC said Gowex lied about its earnings. The stock
plummeted 60 percent in two days after Gotham’s report and trading was
suspended on July 3.
Martinez told Pedraz last week that he was
following Garcia’s orders and couldn’t stop him from faking accounts. Garcia
resigned as chief executive officer on July 5 and told the judge he had
falsified records since at least 2005 and made up clients to attract
investors to the 15-year-old company. University Friend
Two other witnesses told Pedraz today that they too
signed paperwork to form make-believe Gowex clients. Javier Vaquero said
Martinez, a university friend, introduced him to Garcia. Vaquero told the
judge he worked for Gowex for three months making photocopies and signed
ownership papers for 10 companies. He said he left Gowex because they didn’t
pay him, according to the statement.
Antonio Salmeron told Pedraz he created two
companies with Martinez as his partner. They never developed into anything
and were abandoned years ago, he said. Salmeron only found out the
companies, which hadn’t been legally shut down, were being used as Gowex
clients, under his name, when the scandal became public, according to the
statement.
Pedraz questioned Gowex’s auditor, Jose Antonio
Diaz Villanueva, last week and said Diaz admitted that he not only helped
cover up the fictitious accounts, he also didn’t report the money he made
working on Gowex to the tax authorities.
Garcia was ordered to hand in his passport and
report into authorities once a week after appearing before Pedraz on July
14. He was given a 600,000 euro bail and the judge put a freeze on a 3
million-euro bank account in Luxembourg that Garcia told Pedraz he held
under the name of another company.
To continue with the theme of the previous post on
Elliott's Third wave breaks on the shores of accounting, see the following
for some background on the problems with traditional responsibility
accounting and recommended changes.
Jensen Comment
The big problems are the usual suspects in evaluation of managers, including
long-term versus short-term evaluations and activities where managers have
partial but not total control along with circumstantial events over which
managers have no control, e.g., weather and the economy. There are also
externalities that should be taken into account where decisions of a manager
have direct and indirect impacts upon external realms such as how opening or
closing of a plant affects the greater community outside the firm.
Larry Ellison towered again among the top ranks of
the highest-paid CEOs in 2013 with total compensation of $78 million. He is
in plentiful company. Sixty-five chief executives took home annual pay of
more than $20 million last year. What prompts boards of directors to grant
such astounding sums? And why would individuals, who by any objective
measure have all their needs satisfied, seek such exaggerated amounts?
New research by Stanford management professor
Charles A. O’Reilly
shows that it is the persuasive personality and aggressive “me first”
attitude embodied by narcissistic CEOs that helps them land bloated pay
packages. Specifically, narcissistic CEOs are paid more than their
non-narcissistic (and merely self-confident) peers. There is also a larger
gap between narcissists’ compensation and that of their top management teams
than is found with CEOs who do not display the trait. The longer the
narcissists have held the top post, the bigger the differential, according
to the
study
published in The Leadership Quarterly earlier this year.
Narcissism is a personality type characterized by
dominance, self-confidence, a sense of entitlement, grandiosity, and low
empathy. Narcissists naturally emerge as leaders because they embody
prototypical leadership qualities such as energy, self-assuredness, and
charisma.
“They don’t really care what other people think,
and depending on the nature of the narcissist, they are impulsive and
manipulative,” says O’Reilly, whose research examines grandiose narcissism,
a form associated with high extraversion and low agreeableness.
The study that O’Reilly coauthored with UC Berkeley
doctoral student Bernadette Doerr, Santa Clara University professor David F.
Caldwell and UC Berkeley professor Jennifer A. Chatman, surveyed employees
in 32 large publicly traded technology companies to identify the
narcissistic CEOs among them. Employees filled out personality assessments
about their CEOs, which included rating the chiefs’ degree of narcissistic
qualities such as “self-centered,” “arrogant,” and “conceited.”
They also completed a Ten Item Personality
Inventory (TIPI) about their CEOs. In addition, researchers scanned CEOs’
shareholder letters and earnings call transcripts for an abundance of
self-referential pronouns such as “I.” Narcissists use first person pronouns
and personal pronouns more often than their non-narcissistic peers, prior
research shows.
The scholars chose to focus on the quickly
changing, high-stakes technology industry, in part because it prizes
individuals who are convinced of their own vision and who are willing to
take risks. They figured correctly that it would bolster narcissists with
large pay contracts. “In places like Silicon Valley, where grandiosity is
rewarded, we almost select for these people,” says O’Reilly. “We want people
who want to remake the world in their images.”
Narcissistic CEOs secure these pay contracts, at
least in part, by winning over board members. The study found that companies
with highly narcissistic top bosses do not necessarily perform better than
those led by less narcissistic chiefs.
Narcissistic CEO/founders obtained even larger
compensation than their narcissistic peers who didn’t found their companies.
O’Reilly says this is logical given the extreme self-confidence and
persistence of founders, who have to raise capital and overcome obstacles in
order to survive.
“From the board member’s perspective, you’ve got
this person who is quite charming, charismatic, self-confident, visionary,
action-oriented, able to make hard decisions (which means the person doesn’t
have a lot of empathy) and the board says, ‘This is a great leader,’”
O’Reilly says, adding that board members might not necessarily see their
self-serving, superficial qualities.
The paper notes that the CEO is often involved in
hiring a compensation consultant who sets the CEO’s pay. Thus, it is in the
consultant’s interest to make sure the chief is well paid. Unencumbered by a
sense of fairness toward others, narcissists believe they are special and
will often manipulate others in order to get large pay contracts they
believe is their due.
The study also found that the longer the
narcissistic chief executive was in charge, the farther ahead of his team
his pay progressed, because he had recurring exchanges with the board,
seeking more money for himself and less for his team.
A large pay divide between the CEO and other top
executives can chip away at company morale, leading to higher employee
turnover and lower satisfaction, according to O’Reilly’s research. Given the
dissatisfaction and protests this pay gap can breed among employees, the
researchers questioned how narcissistic CEOs could occupy the big office for
so long. While some employees leave on their own accord, the paper supposes
that CEOs may “eliminate those who might challenge them or fail to
acknowledge their brilliance.” The same lack of empathy that makes
narcissists less likeable to underlings also helps these CEOs fire them with
little guilt.
When things go well,
chief executives of major companies rack up hundreds of millions of dollars,
even billions, on their stock allotments and options.
It's always justified
on the grounds that they've created lots of shareholder value. But what
happens when things go badly?
For one example, take
a look at General Electric Co. /quotes/comstock/13*!ge/quotes/nls/ge (GE
16.27, +0.04, +0.22%) , one of America's biggest and most important
companies. It just revealed its latest annual glimpse inside the executive
swag bag.
By any measure of
shareholder value, GE has been a disaster under Jeffrey Immelt. Investors
haven't made a nickel since he took the helm as chairman and chief executive
nine years ago. In fact, they've lost tens of billions of dollars.
The stock, which was
$40 and change when Immelt took over, has collapsed to around $16. Even if
you include dividends, investors are still down about 40%. In real
post-inflation terms, stockholders have lost about half their money.
So it may come as a
shock to discover that during that same period, the 54-year old chief
executive has racked up around $90 million in salary, cash and pension
benefits.
GE is quick to point
out that Immelt skipped his $5.8 million cash bonus in 2009 for the second
year in a row, because business did so badly. And so he did.
Yet this apparent
sacrifice has to viewed in context. Immelt still took home a "base salary"
of $3.3 million and a total compensation of $9.9 million.
His compensation in
the previous two years was $14.3 million and $9.3 million. That included
everything from salary to stock awards, pension benefits and other perks.
Too often, the media
just look at each year's pay in isolation. I decided to go back and take the
longer view.
Since succeeding Jack
Welch in 2001, Immelt has been paid a total of $28.2 million in salary and
another $28.6 million in cash bonuses, for total payments of $56.8 million.
That's over nine years, and in addition to all his stock- and option-grant
entitlements.
It doesn't end there.
Along with all his cash payments, Immelt also has accumulated a remarkable
pension fund worth $32 million. That would be enough to provide, say, a
60-year-old retiree with a lifetime income of $192,000 a month.
Yes, Jeff Immelt has
been at the company for 27 years, and some of this pension was accumulated
in his early years rising up the ladder. But this isn't just his regular
company pension. Nearly all of this is in the high-hat plan that's only
available to senior GE executives.
Immelt's personal use
of company jets -- I repeat, his personal use for vacations, weekend
getaways and so on -- cost GE stockholders another $201,335 last year. (It's
something shareholders can think about when they stand in line to take off
their shoes at JFK -- if they're not lining up at the Port Authority for a
bus.)
Helpers from PwC
The revenue recognition page features a number of key resources,
including a full list of revenue recognition publications and sector-specific
webcasts. Sample documents include:
SUMMARY: Ahead of a refresh of the iPhone, Apple Inc. reported 12%
profit growth and strong sales of its current handset, especially in markets
far afield from its traditional customer base in the U.S. The iPhone results
stood in contrast to iPad sales, which slid for the second consecutive
quarter, raising questions about the future of Apple's tablet as the company
gears up to launch bigger-screen iPhone models.
CLASSROOM APPLICATION: This article offers a variety of managerial
accounting aspects, as well as an opportunity to discuss some financial
statement analysis with a real company.
QUESTIONS:
1. (Introductory) What are Apple's various business segments? Which
of those segments are growing? Are any of them stagnant or in decline?
2. (Advanced) What is segment reporting? What is the value of
segment analysis? How is Apple using segment analysis in the information in
this article? What additional value could Apple be gleaning from segment
analysis that is not presented in this article?
3. (Advanced) What strategies and plans is Apple employing based on
the conclusions it has reached from segment data? Do you think the company
is making the right moves? Why or why not?
4. (Advanced) What is gross margin? What did the company report
regarding year-to-year gross margin? How did that compare with analyst's
expectations? What factors likely contributed to the change in gross margin?
5. (Advanced) What new segments is the company considering or
expanding? Why are these segments attractive to Apple?
Reviewed By: Linda Christiansen, Indiana University Southeast
Ahead of a refresh of the iPhone, Apple Inc. AAPL
-0.16% reported 12% profit growth and strong sales of its current handset,
especially in markets far afield from its traditional customer base in the
U.S.
The iPhone results stood in contrast to iPad sales,
which slid for the second consecutive quarter, raising questions about the
future of Apple's tablet as the company gears up to launch bigger-screen
iPhone models.
The consumer electronics giant said it sold 35.2
million iPhones in the quarter ended June 28, up 12.7% from a year earlier
and just shy of analysts' estimates. Apple said the growth was helped by
demand from Brazil, Russia, India, and China—collectively known as the BRIC
countries—where iPhone sales rose 55%.
The iPhone growth propelled Apple's profit in its
third quarter to $7.75 billion, up from $6.9 billion in the year-ago period.
Revenue rose 6% to $37.4 billion.
"We're thrilled with the results, and we're
thrilled with where we are going," Apple Chief Executive Tim Cook said in an
interview. "The momentum is really strong."
Shares of Apple, which closed at $94.72 on Tuesday,
were little changed after the report.
Apple has entered into a period of steady growth
and efficient earnings, generating billions of dollars of cash every
quarter. But it will likely need to enter new product categories to reignite
earnings that have flattened after more than a decade of remarkable growth.
This year, the Cupertino, Calif., company is
banking on an expected new product push of larger iPhones and a series of
smartwatches before year-end, people familiar with the matter have said. In
the past few years, the June quarter has been the slowest for Apple as the
company gears up with new products ahead of the year-end.
Despite what new Chief Financial Officer Luca
Maestri characterized on the analysts' conference call as "new product
rumors" pushing customers to hold off on potential purchases, iPhone sales
were at the high end of Apple's expectations, he said.
But Apple struggled for the second consecutive
quarter to sell iPads, with unit sales falling 9.2% after a 16% drop three
months earlier. In the quarter just two years ago, iPad sales were up 84%.
Apple appears to be struggling, like other tablet
makers, with sluggish demand overall in North America and Europe—the base of
iPad growth in recent years. Apple said this runs contrary to strong demand
in emerging markets, especially in China and the Middle East.
On the call, Mr. Cook said iPad sales met his
expectations and that the iPad is still in its early days. "This isn't
something that worries us," he said in an interview.
Macintosh sales showed growth for the third
straight quarter, with units rising 18% to 4.4 million units. Undescoring
the diverging trajectory of iPads and Macs, the gap in revenue between the
two products is fast closing: Apple sold $5.44 billion worth of Macs in the
quarter, compared with $5.9 billion in iPads. The last time Mac revenue
topped iPad's was in 2011 when the tablet was still in its early days.
SUMMARY: Let's Gowex SA is a Spanish start up company that provides
Wi-Fi hot spots in major cities around the world. After assertions by a
short-seller, Gotham Research, that most of Gowex's revenues must be
suspect, the founder admitted last Saturday to fabricating the financial
reports filed with the stock exchange on which the company traded, the
Alternative Stock Market.
CLASSROOM APPLICATION: The article may be used in an ethics class,
a general financial reporting class, or auditing class.
QUESTIONS:
1. (Introductory) What service does Let's Gowex SA supply? What
problems arose with the company's implementation of service in Paris?
2. (Advanced) Who is Gotham City Research LLC, what does it do, and
how did its work result in the admission by Gowex's founder of fabricating
financial statements? In your answer, define the term "short sale."
3. (Introductory) What does Professor Robert Tornabell say should
come about because of the Gowex fraud? In your answer, comment on the
requirements of the stock exchange on which Gowex was traded.
4. (Advanced) What might be the effects on other small Spanish
companies of this admission that Gowex fabricated its financial statements?
Reviewed By: Judy Beckman, University of Rhode Island
When Jenaro García's tech company Let's Gowex SA
GOW.MC -26.05% won the top prize from Spain's marketing association in May,
the presenter hailed him as an innovator who was making wireless Internet
ubiquitous, "a magician who converted Wi-Fi into water."
Mr. García, outfitted in an Indiana Jones-style
jacket, appeared before the appreciative crowd alongside Wi-Fi Man, a
masked, caped superhero figure.
The cheering for Mr. García stopped this month as
Gowex's success story abruptly unraveled. U.S. investment firmGotham City
Research LLC on July 1 posted a takedown of the company, asserting that its
stellar financial results were largely fabricated and its highflying stock
worthless.
With investors jumping ship, Mr. García gave one
last defiant performance on Friday. At a meeting of employees, the
46-year-old chairman and chief executive vowed to bring "Wi-Fi to Gotham."
To demonstrate his resilience, he brandished metal pins that he said had
been used to set 24 broken bones he had suffered in an accident years
The next day, though, he told Gowex's board that
the financial results had been fabricated for at least four years. Gowex
filed for bankruptcy, and Mr. García sent a tweet asking forgiveness from
those he had harmed.
Mr. García couldn't be reached for comment, and
Gowex declined to comment.
Mr. García, who had been held up as the archetype
of a new brand of Spanish entrepreneur, now has become a reason to doubt the
solidity of a business class that the government is counting on to lead a
recovery from Spain's worst recession in decades.
"I feel ashamed as a Spaniard and as a professor of
corporate finance because I know that American investors will say 'Oh, be
careful before you invest in smaller companies in Spain,' " said Robert
Tornabell, a professor at ESADE business school in Barcelona. "This scandal
must lead to stronger regulations, and the companies must have real
auditors."
As other stocks plummeted on the Alternative Stock
Market, the secondary exchange where Gowex had traded, some companies sought
to be relisted elsewhere. "Gowex had discovered a toy market with few powers
to function correctly," said an editorial in the Spanish business daily El
Economista.
Government officials and groups that had showered
Gowex with awards attempted to dissociate themselves from its disgraced
leader.
"When you give a prize, you listen to what the
analysts say, what the market says, what investors say and everyone at that
point thought they were good and worthy," said a spokesman at Ernst & Young
LLP, which had given Mr. García an award for innovation as part of its 2011
Spanish Entrepreneur of the Year program. "He has cheated the whole country
and not just this country but France, the U.S., all of the world."
Ernst & Young served as Gowex's registered adviser
from when the company listed its shares in 2010 until its collapse. The
spokesman said Ernst & Young's mandate wasn't to audit information Gowex
sent to the market, only to ensure that it was "presented in the right
format and in a timely fashion."
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 6, 2014
SUMMARY: "New rules released
Wednesday[, May 28, 2014, jointly by the
FASB and IASB] will overhaul the way businesses record revenue...capping a
12-year project....The new standards...will take effect in 2017 [and will
cause] ... a broad array of companies...either to speed up or slow down the
rate at which they book at least some of their revenue....Companies were
cautious in assessing the potential impact of the overhaul...." Many
companies are optimistic about eliminating the many inconsistencies across
industries in current U.S. revenue recognition requirements. With greater
consistency in timing of revenue recognition, the new standard also should
help improve reporting issues because "...allegations of improperly speeding
up or deferring revenue have been at the heart of many accounting-fraud
scandals."
CLASSROOM APPLICATION: The article may be used in any financial
accounting course covering revenue recognition. It is more helpful to access
information from the FASB's web site to understand the objectives and
requirements of the standard. The summary of the Accounting Standards Update
(ASU) is linked in the first question. The article focuses more on the
expected results and effects across different industries.
2. (Introductory) According to the article, what types of
industries or products will be most affected by the new requirements?
3. (Introductory) Review the graphic entitled "On the Books" which
compares accounting for software, wireless devices, and automobiles under
present GAAP and the new revenue recognition requirements. How do the new
requirements move the accounting to be more similar across these three
products?
4. (Advanced) Consider the current requirements for revenue
recognition in these three products. What was the reasoning behind these
differences? That is, what is the determining factor for the point of
recognizing a sale and how does it differ across these three products? Cite
any source you use in developing your answer.
Reviewed By: Judy Beckman, University of Rhode Island
New rules released Wednesday will overhaul the way
businesses record revenue on their books, capping a 12-year project that
will affect companies ranging from software firms to auto makers to wireless
providers.
The new standards, issued jointly by U.S. and
global rule makers, will take effect in 2017, prompting a broad array of
companies—from software giants like Microsoft Corp. MSFT -0.42% and Oracle
Corp. ORCL +0.23% to major appliance makers—either to speed up or slow down
the rate at which they book at least some of their revenue.
The rules aim to simplify and inject more
uniformity into one of the most basic yardsticks of a company's
performance—how well its products or services are selling.
"It's one of the most important metrics for
investors in the capital markets," said Russell Golden, chairman of the
Financial Accounting Standards Board, which sets accounting rules for U.S.
companies and collaborated on the new rules with the global International
Accounting Standards Board.
Companies were cautious in assessing the potential
impact of the overhaul, but some were optimistic. "We've been waiting for it
for a long time," said Ken Goldman, chief financial officer of Black Duck
Software Inc., a provider of software and consulting services. "This levels
the playing field and takes a lot of the ambiguity out of what are overly
restrictive rules."
The rules are designed to replace fragmented and
inconsistent standards under which companies in different industries often
record their revenue differently and sometimes book a portion of it well
before or after the sales that generate it.
"We wanted to make sure there was a consistent
method for companies to identify revenue," said the FASB's Mr. Golden.
But the new rules could make corporate earnings
more volatile, accounting experts said, by changing the timing of when
revenue is recorded. They also could lead to increased costs for companies
as they seek to track their performance while providing the additional
disclosure the new standards require.
"This has at least the potential to affect every
company," said Joel Osnoss, a partner at accounting firm Deloitte & Touche
LLP. They "really should look at the standard" and ask how the revenue-rule
changes will affect them, he said.
Accounting rule makers have long focused on the
question of when businesses should book revenue, because it touches every
company and can be an area ripe for fraud. Allegations of improperly
speeding up or deferring revenue have been at the heart of many
accounting-fraud scandals.
In 2002, for example, Xerox Corp. XRX +0.93% paid a
big settlement to the Securities and Exchange Commission to resolve
allegations that it had improperly accelerated revenue. Xerox didn't admit
or deny the SEC's allegations.
The new rule's impact will be most felt in a
handful of industries in which goods and services are "bundled" together and
parts of that package are provided long before or after customers pay for
them. These include such benefits as maintenance that comes with the
purchase of a new car, or software upgrades given to customers who bought
the original program.
In such cases, the time at which companies
recognize revenue is often out of sync by months or years with when
customers get the goods and services associated with it. For instance, when
auto and appliance makers sell their products, they typically book the
purchase price immediately, but the transactions can also include free
maintenance or repairs under warranty that the company might not provide for
months or years.
Under the new rules, the manufacturer would book
less revenue up front and more revenue later, because some of the revenue
from the car or appliance would be assigned to cover future service costs.
As a result, some of a company's revenue might be stretched over a longer
period.
Conversely, software makers such as Microsoft and
Oracle might be able to recognize some revenue more quickly. Software
companies now often have to recognize their revenue over time, because they
have to wait until all of the software upgrades and other pieces of a sale
are delivered to the customer. The new rules will make it easier for
companies to value upgrades separately and so recognize more of the
software's overall revenue upfront, Mr. Golden said.
Microsoft and Oracle declined to comment.
Similarly, wireless phone companies like Verizon
Communications Inc. VZ +0.32% and AT&T Inc. T -0.14% might book some revenue
faster under the new rules. Currently, a wireless company books revenue each
month, as customers receive wireless services—but none of that revenue is
allocated to any phone that customers get free or for a low price.
That will change under the new rules; some of the
monthly revenue will be applied to those phones. And since customers get the
phone when they first sign up, at the beginning of their contracts, that
will have the effect of pulling the revenue forward in time, allowing the
company to book it earlier.
Verizon and AT&T didn't have any immediate comment.
Even companies that aren't affected so much by the
timing changes will have to disclose more about the nature and certainty of
their revenue—something Deloitte & Touche's Mr. Osnoss said will help
investors. "I think investors are going to have much more of a view into the
company."
But companies may find that providing that
information complicates their lives and raises their costs. "For the
majority of people, it's going to be difficult," said Peter Bible, chief
risk officer for accounting firm EisnerAmper and a former chief accounting
officer at General Motors Co. GM +0.39%
Handicaps and Uneven Playing Fields in Data Analysis: How Good Is
Andrew Luck?
Jensen Comment
It is really difficult to compare greatness on unequal playing fields. In terms
of military commanders, Robert E. Lee is rated by some analysts as better than
Ulysses S. Grant even though Lee went down in devastating defeat.
Uneven playing fields greatly complicate statistical data analysis. There are
various terminologies that essentially mean the same thing such as "varying
circumstances" and "handicaps." A handicap horse race means that extra weights
are placed on each favored horse. Afterwards it's very difficult to compare the
outcomes for any two horses carrying different handicap weightings. In golf the
handicapped winners can later be compared on the basis of their non-handicapped
scores. In a horse race, however, this is impossible since the horses on a given
day on given track conditions did not carry equal wights.
Quarterback comparisons are more like comparing handicapped race horses than
golfers since each quarterback has a different supporting case of offensive
linemen, wide receivers, tight ends, running backs, blocking backs, and on and
on and on.
However, even even handicapped golfers are a bit difficult to compare in
terms of handicapped versus non-handicapped tournaments. The reason is that how
they play the game may be different in a handicapped tournament. A very great
and steady great player in a non-handicapped tournament may be inclined to take
more risks in a handicapped tournament, and not all great golfers are equal when
motivated to take risks.
Alas, there are more uneven playing fields (handicaps) in both sports and
life in general than perfectly even playing fields.
SUMMARY: Corporate-earnings growth is forecast to accelerate this
year as are revenues. Nonetheless, the companies in the S&P 500 are trading
at higher multiples of forecasted 12 month earnings than at anytime since
June 2007 and greater than the average for the last ten years. This
dichotomy results in differing opinions about stock market valuations
discussed in this article.
CLASSROOM APPLICATION: The article may be used in any general
financial reporting class to discuss quarterly earnings reports, earnings
and revenue forecasts, and the use of price-to-earnings ratios.
QUESTIONS:
1. (Introductory) What is "earnings season"?
2. (Advanced) What do market participants expect in the earnings
reported in the second quarter of 2014? Who establishes those expectations
and how are they reported?
3. (Advanced) How are current stock market prices assessed relative
to the expected earnings discussed above? In your answer, name a financial
statement ratio that helps to make this assessment.
4. (Introductory) How is revenue assessed differently from earnings
in this article? In your answer, define the terms revenue and earnings.
Reviewed By: Judy Beckman, University of Rhode Island
After a cold winter, stock investors are looking to
earnings growth for further proof that the economy is warming up.
The Dow Jones Industrial Average broke through
17000 for the first time ever last week, powered by an upbeat jobs report
that was the latest in a string of strong U.S. economic indicators. That
helped cement investors' view that the weakness caused by severe weather in
the first quarter was behind them.
Now, with stocks trading at their highest levels in
seven years when compared with expected earnings, some investors say
corporate revenue and profits need to accelerate to sustain the rally,
especially as the Federal Reserve continues to pare back stimulus measures.
"People are going to want to see an improvement in
earnings," said Greg Luttrell, who manages $272 million in the J.P. Morgan
Dynamic Growth Fund. "That would confirm that, yes…growth is on track."
Mr. Luttrell is holding on to so-called growth
stocks such as Facebook Inc., FB +1.97% Priceline.com PCLN -0.17% and Google
Inc. GOOGL +0.89% that sold off steeply in March and April amid concerns
that the shares were overvalued. Valuations of these stocks have fallen to
reasonable levels, and they could start to look more attractive if those
companies report strong earnings, he said.
The unofficial start to earnings season comes
Tuesday, when aluminum producer Alcoa Inc. AA +1.66% reports second-quarter
results. Alcoa's earnings per share in the period are expected to double
from the second quarter of 2013, according to consensus estimates from
FactSet.
S&P 500 companies are forecast to show a 4.9% rise
in second-quarter earnings per share from the previous year, according to
FactSet. While that still would fall short of the 8.6% growth in the fourth
quarter of 2013, it would outpace the 2.1% rise posted in the first quarter.
For the rest of the year, Wall Street analysts'
outlook is even rosier. Estimates call for profits to increase at their
fastest pace since 2011, according to FactSet.
"If the economy is accelerating, those expectations
may be reasonable," said Patrick Kaser, lead manager for two funds
overseeing $6.1 billion in stocks and fixed income for Brandywine Global
Investments. Mr. Kaser has been buying shares of auto makers, airlines and
industrial firms, which tend to rise in tandem with the economy.
Mr. Kaser said he would be keeping a close eye on
companies, such as Reliance Steel & Aluminum Co. RS +0.06% , that he
considers to be proxies for growth. If the metal-processing and distribution
firm sees more demand from customers, that "would benefit them, but it would
also be a good economic indicator," he said.
To be sure, some investors still consider
valuations to be stretched despite selloffs in some corners of the stock
market in recent months. The S&P 500 is trading at 15.7 times its expected
earnings for the next 12 months, the highest since June 2007 and above its
average of 13.9 over the past 10 years, according to FactSet.
"To a certain degree, valuations still make us
nervous," said Mark Spellman, portfolio manager with Alpine Funds, which
oversees about $2.1 billion. "There are lots of good companies, but that
doesn't always translate into a stock you're going to make money in."
As a result, Mr. Spellman is holding 10% of his
portfolio in cash, a higher level than usual, since he is having trouble
finding deals on stocks.
Continued in article
Teaching Case
From The Wall Street Journal's Weekly Accounting Review on July 11, 2014
SUMMARY: This article explains the tax provisions for withdrawals
from both regular and Roth IRAs very clearly. The article highlights two
items that lead readers to seek professional advice: (1) calculating the
amount of allowable withdrawals when a taxpayer meets the criteria for
avoiding a penalty on withdrawals before age 59 ½; and (2) tracking
withdrawals from Roth IRAs after age 59 ½ but before holding an investment
for 5 years to determine the non-taxable versus taxable portions. A
discussion question asks students to think about themselves as a
professional offering personal tax service and whether this type of article
helps or hinders them.
CLASSROOM APPLICATION: The article may be used in a personal tax
class.
QUESTIONS:
1. (Introductory) What is an IRA? What two types of IRAs exist in
U.S. tax law?
2. (Advanced) Summarize the basic rules relating to IRAs and
withdrawing from them, including the reasoning behind the penalty for
withdrawal before age 59 ½.
3. (Advanced) In what cases may an individual withdraw from an IRA
before age 59 ½ without penalty? What do you think is the reasoning behind
these provisions in the tax law?
4. (Advanced) Suppose you are a practicing CPA with a personal tax
client base. Do you think this type of an article reduces the value of your
services or hurts your potential to give client services? Explain.
Reviewed By: Judy Beckman, University of Rhode Island"
Make an early withdrawal from an IRA and you may be
hit with a 10% tax penalty.
But that's a bigger "may" than you might think.
Financial advisers generally warn against tapping
an individual retirement account early, and not just because of the
potential tax penalty. There's also the loss of any investment gains that
could have been racked up by the money that's withdrawn. "If you have other
assets, use them" instead, says Maria Bruno, senior investment analyst at
Vanguard Group.
But if you must tap an IRA early, the good news is
that there are several exceptions to the tax penalty.
Here's what you need to know.
First, what are the basic rules on the taxation of
IRA withdrawals?
If all your contributions to your traditional IRA
were tax-deductible, all your withdrawals will be taxable as ordinary
income. If you made some after-tax contributions as well, a part of each
withdrawal may be tax-free. (We'll talk about Roth IRAs, which are funded
only with after-tax dollars, separately below.)
Taking a distribution from an IRA before age 59½
generally incurs a penalty—an additional 10% of the taxable amount.
There are several specific exceptions to that
penalty, though. And if you don't qualify for one of those, you may be able
to avoid the penalty by taking a series of payments from the IRA over
several years.
What are the specific exceptions to the 10%
penalty?
If you have lost your job and collected 12
consecutive weeks of state or federal unemployment compensation, you can use
money from an IRA at any age, without penalty, to pay health-insurance
premiums. There also is no penalty if an early distribution goes for
qualified higher-education expenses, such as college or vocational-school
tuition for yourself, your spouse, your children or grandchildren, or your
spouse's children or grandchildren.
You can withdraw up to $10,000—$20,000 for a
couple—penalty-free to buy, build or rebuild a first home, and that, too,
applies for children and grandchildren. There also is an exception if the
money goes to pay for unreimbursed medical expenses greater than 10% of your
adjusted gross income (7.5% if you or your spouse was born before 1949). You
also would be exempt from the penalty if you become disabled before you are
59½.
There are some additional exceptions and in some
cases conditions to qualify for an exception. For more information see
Internal Revenue ServicePublication 590.
How do the periodic payments work?
You can avoid the 10% penalty by taking a series of
roughly equal payments over five years or until you are 59½, whichever is
longer, making at least one withdrawal annually. But calculating how much
you can take is complicated. Even the IRS says you may want to consult a
financial professional.
The amount depends on which of the three
IRS-approved calculation methods you choose, all based on life
expectancy—either yours alone or yours and your beneficiary's. The simplest
calculation method is known as required minimum distribution, or RMD—something
of a misnomer because it results in the exact amount that must be withdrawn,
not a minimum. The amount must be recalculated every year, changing with
your age and any fluctuations in the account balance.
Continued in article
From the CPA Newsletter on July11, 2014
IRS tightens rules on IRA rollovers The Internal Revenue
Service formalized a new interpretation of the one-rollover-per-year rule
for IRAs by withdrawing proposed regulations from 1981 that had allowed
taxpayers with multiple IRAs to make one rollover per year from each IRA.
Starting in 2015, taxpayers will only be able to make one rollover per year
no matter how many IRAs they own.
Journal of Accountancy online
(7/10)
Under the Sarbanes-Oxley Act of
2002, monetary penalties imposed by the PCAOB must be used to
fund merit scholarships for students in accredited accounting
degree programs. The Board has established the PCAOB Scholarship
Program to provide a source of funding to encourage outstanding
undergraduate and graduate students to pursue a career in
auditing.
Scholarship
Program Administration
The Board has hired
Scholarship America of Minneapolis, Minnesota, to administer and
manage the program on behalf of the PCAOB, including contacting
eligible educational institutions, providing customer service,
and disbursing funds. On an annual basis, the PCAOB will select,
with the help of Scholarship America, educational institutions
and invite them each to nominate, by the deadline, an eligible
student as a recipient of the PCAOB Scholarship. The
scholarships are one-time awards that will be paid directly to
the educational institution for eligible expenses such as
tuition, fees, books, and supplies. Recipients will receive
written notification of their selection as well as notification
when the funds have been provided to the school.
Selection of Nominating
Institutions
Accredited U.S. colleges and
universities that award bachelor's or master's degrees in
accounting and report the number of degrees awarded using the
Integrated Postsecondary Education Data System are eligible to
be selected to nominate students for the scholarships. Eligible
institutions will be divided into two groups; Group A includes
the one hundred institutions with the highest total of master's
degrees in accounting conferred during the preceding five
academic years, and Group B contains all other institutions that
offer bachelor's or master's degrees in accounting.
The PCAOB, with Scholarship
America's help, will select institutions to provide student
nominations by using a statistical selection process that
follows protocols for fairness and impartiality. Seventy-five
percent of the scholarships will go to students attending
institutions in Group A and twenty-five percent will be awarded
to students who attend institutions in Group B. Schools selected
as nominating institutions in a given year will not be
considered for selection for the next five years or until all
institutions in the respective group have been selected,
whichever occurs first.
Student Eligibility Criteria
The Program is merit-based and
students eligible to receive a PCAOB Scholarship must:
Be enrolled in a
bachelor's or master's degree program in Accounting
Demonstrate interest and
aptitude in accounting and auditing
Demonstrate high ethical
standards
Not be a PCAOB employee
or a child or spouse of a PCAOB employee. (Note: This
includes all full-time and part-time employees of the PCAOB,
including interns, and independent consultants who are
natural persons.)
The PCAOB supports the
development of a diverse accounting profession and encourages
educational institutions to give consideration to students from
populations that have been historically underrepresented in the
profession, in determining student nominations.
An Ontario judge has ordered Deloitte & Touche to
pay $33-million in interest payments to creditors of defunct theatre company
Livent Inc., bringing the auditing firm’s total payments in the long-running
negligence case to $118-million.
The interest payments were the final issue to be
determined by Ontario Superior Court Justice Arthur Gans in a lawsuit
between Livent’s lenders and Deloitte. He ruled in April that Deloitte must
pay $85-million in damages to creditors because auditors were negligent in
their review of Livent’s 1997 financial statements, but said at the time he
would hear further submissions on how to calculate interest on the payment.
SUMMARY: A federal judge said PricewaterhouseCoopers LLP must face
the Federal Deposit Insurance Corp.'s $1 billion lawsuit that alleges the
accounting firm failed to catch the massive fraud that brought down Colonial
Bank, one of the largest bank collapses in U.S. history. Judge W. Keith
Watkins of the U.S. District Court in Montgomery, Ala., said the FDIC's
theory that the auditor's failure to uncover the fraud was "plausible"
enough to allow the suit to survive. The accounting firm's lawyers have
previously argued the FDIC's suit is without merit because Colonial's own
management and largest customer-Taylor Bean-lied to regulators, internal
auditors and to PwC itself.
CLASSROOM APPLICATION: This article could be used when covering the
issues of auditor liability for fraud.
QUESTIONS:
1. (Introductory) What are the facts of this case? Who are the
parties to this lawsuit? What was the judge's ruling?
2. (Advanced) What was the reasoning behind the judge's ruling?
What particular issue was he addressing?
3. (Advanced) What are the rules regarding auditor detection of
fraud? Are auditors responsible to detect fraud?
4. (Advanced) What are fraud examiners? What are their tasks and
responsibilities? How does fraud examination differ from auditing?
5. (Introductory) Who was behind the fraud at Taylor Bean? What was
his scheme? What happened to him? Could he have the same punishment if his
boss had instructed him to do these activities?
Reviewed By: Linda Christiansen, Indiana University Southeast
A federal judge said PricewaterhouseCoopers LLP
must face the Federal Deposit Insurance Corp.'s $1 billion lawsuit that
alleges the accounting firm failed to catch the massive fraud that brought
down Colonial Bank, one of the largest bank collapses in U.S. history.
Judge W. Keith Watkins of the U.S. District Court
in Montgomery, Ala., said Tuesday that the FDIC's theory that the auditor's
failure to uncover the fraud was "plausible" enough to allow the suit to
survive. It was the second legal setback in as many weeks for the accounting
firm.
"FDIC's theory is that the defendants failed to
discover existing fraud at the time of their auditing services, which
permitted the continuation of the fraudulent scheme, albeit through
different means," Judge Watkins wrote in a six-page order. "It is plausible
that the defendant auditors should have reasonably anticipated that a
general fraudulent scheme would continue if their allegedly faulty auditing
services failed to detect existing wrongdoing."
The FDIC, as the receiver for the failed Alabama
bank, sued PwC and fellow accounting firm Crowe Horwath LLP for failing to
detect the long-running fraud at Colonial's largest client, Taylor Bean &
Whitaker Mortgage Corp.
The FDIC lawsuit, which already survived an earlier
legal challenge from the accounting firms, blames the auditors for missing
"huge holes in Colonial's balance sheet" and other serious gaps without ever
detecting the multibillion-dollar fraud at Taylor Bean.
The Taylor Bean fraud "would have been prevented
had PwC and Crowe properly performed their audits in compliance with
applicable professional standards," said the FDIC's lawyers in the suit.
PwC and Crowe Horwath have denied any wrongdoing.
A PwC spokeswoman wasn't immediately available for
comment Wednesday, but the accounting firm's lawyers have previously argued
the FDIC's suit is without merit because Colonial's own management and
largest customer—Taylor Bean—lied to regulators, internal auditors and to
PwC itself. Crowe Horwath spokeswoman Amanda Shawaluk said the firm believes
that all claims against Crowe are totally without merit.
The FDIC has been left with remnants of hundreds of
failed banks in recent years, the result of the wave of bank closures by
regulators in the aftermath of the bursting of the housing bubble. Although
the FDIC transfers a failed bank's deposits to a stronger company—to BB&T
Corp. BBT +0.75% (BBT) in Colonial's case—it is left as a receiver for what
remains.
The collapse of Colonial, which had $25 billion in
assets and $20 billion in deposits, was the biggest bank failure of 2009.
The regulator estimates Colonial's failure will ultimately cost its
insurance fund $5 billion, making it one of the most expensive bank failures
in U.S. history. The FDIC, however, hadn't made a point of targeting the
professional firms who advised the failed banks until filing the original
Colonial lawsuit in 2012.
The mastermind behind the fraud at Taylor Bean was
the company's top executive, 61-year-old Lee Farkas, who is now serving a
30-year prison sentence in North Carolina for orchestrating the seven-year
fraud that pumped a pile of bad loans into what appeared to be billions of
dollars of assets.
His scheme involved Colonial "purchasing" mortgage
loans from Taylor Bean that already had been sold to other investors, such
as Freddie Mac. He wasn't caught until after federal authorities raided
Colonial's and Taylor Bean's offices in August 2009.
Mr. Farkas, whom federal prosecutors described as a
"consummate fraudster," was convicted in the spring of 2011 of
misappropriating about $3 billion and trying to fraudulently obtain more
than $550 million from the government's Troubled Asset Relief Program in a
failed effort to prop up Colonial.
An Alabama federal judge refused Tuesday to dismiss
Federal Deposit Insurance Corp. claims against PricewaterhouseCoopers LLC
and another company over alleged failures in their auditing of Colonial
Bank, saying the agency didn't need to show it could have anticipated the
form that an $899 million mortgage fraud would take.
U.S. District Judge Keith Watkins said the FDIC had
sufficiently pled the claims that auditor negligence enabled double- and
triple-pledging by Taylor Bean & Whitaker Mortgage Corp., a scheme in which
Taylor Bean allegedly kept loan proceeds...
BoardroomDirect: Update on current board issues - June 2014
This issue of BoardroomDirect® includes an article about the
influence of activist shareholders and the role they play today in forcing
change. There is also news about a Delaware bill that would prohibit
fee-shifting bylaws, environmental groups warning boards of fossil fuel
companies about climate-change litigation, the new converged revenue
recognition standard, and the first round of conflict minerals disclosures.
ProxyPulse Second Edition 2014 This second 2014
edition of ProxyPulse, a special publication from PwC's Center for Board
Governance and Broadridge Financial Solutions, covers 2,788 shareholder
meetings held between January 1 and May 22, 2014.
USA Schools: 1776
versus 1876 versus 1976 and beyond
Back when
schools were just not about four-hour days, long bus rides, breakfast, and lunch
"Here's What School Was Like
In America Back In 1776," by Dan Abendschein,
Business Insider, July 3, 2014 ---
http://www.businessinsider.com/school-america-1776-2014-7
On-the-job training
ruled. Learning was all about apprenticeships back then, according
to Paula Fass, a history professor at UC- Berkeley. Blacksmiths, brewers,
printers and other tradesmen learned their crafts on the job. Women learned
most of their skills--spinning, cooking, sewing, at home. "In our
school-centered obsession we forget that learning used to take place in a
much more broad-based way,"says Fass.
Only white men were formally educated.
While some white men never received much formal education, almost nobody
else received any. Girls were sometimes educated, but they didn’t go to
college. Blacks were mostly forbidden to learn to read and write, and Native
Americans were not part of the colonial education system. They relied
mainly on oral histories to pass down lessons and traditions.
Classroom, what classroom? Actual
schools were found mainly in cities and large towns. For most other people,
education meant a tutor teaching a small group of people in someone's home
or a common building. And the school year was more like a school season:
usually about 13 weeks, says USC historian Carole Shammas. That meant that
there was almost no such thing as a professional teacher.
Books were few and far between. There
were no public libraries in the country in 1776. The biggest book
collections were at colleges. Books were so expensive that getting a large
enough collection to provide a serious education was one of the biggest
barriers to founding a college. When Harvard was founded in 1636, it had a
collection of about 1,000 books, which was considered an enormous amount at
the time, according to Paula Fass.
Writing joined the other R’s. Teaching
students to read was a lot easier than teaching writing, and writing was not
necessary in a lot of professions. So many students learned just to read
and do math. By 1776, teaching writing was becoming much more common.
No papers, pens, or pencils. Most
students worked on slates--mini-chalkboards that allowed students to erase
their work and keep at it until they got it right. Paper was expensive, so
it was not commonly used, which also meant pens were not often used.
Pencils had not yet been invented.
Jensen Comment
Dan did not write about the enormous progress made in USA schools between 1776
and 1876. I did not attend a one-room country school in northern Iowa, but my
grandparents attended such schools. My Grandma Jensen even taught in what was
known as "normal school" before she got married ---
http://en.wikipedia.org/wiki/Normal_school
A normal school is a school created to train high
school graduates to be teachers. Its purpose is to establish teaching
standards or norms, hence its name. Most such schools are now called
teachers' colleges.
In 1685, John Baptist de La Salle, founder of the
Institute of the Brothers of the Christian Schools, founded what is
generally considered the first normal school, the École Normale, in Reims.
According to the Oxford English Dictionary, normal schools in the United
States and Canada trained primary school teachers, while in Europe normal
schools educated primary, secondary and tertiary-level teachers.[1]
In 1834, the first teacher training college was
established in Jamaica by Sir Thomas Fowell Buxton under terms set out by
Lady Mico's Charity "to afford the benefit of education and training to the
black and coloured population." Mico Training College (now Mico University
College) is considered the oldest teacher training institute in the Western
Hemisphere and the English-speaking world.
The first public normal school in the United States
was founded in the Commonwealth of Massachusetts in 1839. It operates today
as Framingham State University. In the United States teacher colleges or
normal schools began to call themselves universities beginning in the 1960s.
For instance, Southern Illinois University was formerly known as Southern
Illinois Normal College. The university, now a system with two campuses that
enroll more than 34,000 students, has its own university press but still
issues most of its bachelor degrees in education.[2] Similarly, the town of
Normal, Illinois, takes its name from the former name of Illinois State
University.
Many famous state universities—such as the
University of California, Los Angeles—were founded as normal schools. In
Canada, such institutions were typically assimilated by a university as
their Faculty of Education, offering a one- or two-year Bachelor of
Education program. It requires at least three (usually four) years of prior
undergraduate studies.
Continued in article
Jensen Comment
Dan may be correct about 1776 but he's certainly wrong about 1876 when
"on-the=job" training did not rule, at least not if farm country where children
learned how to farm at home. School was deep into learning Latin, grammar,
writing, history, geography, literature, and mathematics. Many of America's
famous writers were educated in country schools of the 1800s. Students brought
their own lunches from home after eating hearty breakfasts after early morning
chores such as picking eggs and helping with the milking. .
1. Give nine
rules for the use of Capital Letters.
2. Name the
Parts of Speech and define those that have no modifications.
3. Define Verse,
Stanza and Paragraph.
4. What are the
Principal Parts of a verb? Give Principal Parts of do, lie, lay and run.
5. Define Case,
Illustrate each Case.
6. What is
Punctuation? Give rules for principal marks of Punctuation.
7. - 10. Write a
composition of about 150 words and show therein that you understand the
practical use of the rules of grammar.
Arithmetic
(Time, 1.25 hours)
1. Name and
define the Fundamental Rules of Arithmetic.
2. A wagon box
is 2 ft. deep, 10 feet long, and 3 ft. wide. How many bushels of wheat will
it hold?
3. If a load of
wheat weighs 3942 lbs., what is it worth at 50 cts.bushel, deducting 1050
lbs. for tare?
4. District No.
33 has a valuation of $35,000. What is the necessary levy to carry on a
school seven months at $50 per month, and have $104 for incidentals?
5. Find cost of
6720 lbs. coal at $6.00 per ton.
6. Find the
interest of $512.60 for 8 months and 18 days at 7 percent.
7. What is the
cost of 40 boards 12 inches wide and 16 ft. long at $20 per metre
8. Find bank
discount on $300 for 90 days (no grace) at 10 percent.
9. What is the
cost of a square farm at $15 per are, the distance around which is 640 rods?
10. Write a Bank
Check, a Promissory Note, and a Receipt.
U.S. History
(Time, 45 minutes)
1. Give the
epochs into which U.S. History is divided.
2. Give an
account of the discovery of America by Columbus.
3. Relate the
causes and results of the Revolutionary War.
4. Show the
territorial growth of the United States.
5. Tell what you
can of the history of Kansas.
6. Describe
three of the most prominent battles of the Rebellion.
7. Who were the
following: Morse, Whitney, Fulton, Bell, Lincoln, Penn, and Howe?
8. Name events
connected with the following dates: 1607 1620 1800 1849 1865.
Orthography
(Time, one hour)
1. What is meant
by the following: Alphabet, phonetic, orthography, etymology, syllabication?
2. What are
elementary sounds? How classified?
3. What are the
following, and give examples of each: Trigraph subvocals, diphthong, cognate
letters, linguals?
4. Give four
substitutes for caret 'u.'
5. Give two
rules for spelling words with final 'e.' Name two exceptions under each
rule.
6. Give two uses
of silent letters in spelling. Illustrate each.
7. Define the
following prefixes and use in connection with a word: Bi, dis, mis, pre,
semi, post, non, inter, mono, sup. Mark diacritically and divide into
syllables the following, and name the sign that indicates the sound:Card,
ball, mercy, sir, odd, cell, rise, blood, fare, last.
9. Use the
following correctly in sentences, cite, site, sight, fane, fain, feign,
vane, vain, vein, raze, raise, rays.
10. Write 10
words frequently mispronounced and indicate pronunciation by use of
diacritical marks and by syllabication.
Geography
(Time, one hour)
1. What is
climate? Upon what does climate depend?
2. How do you
account for the extremes of climate in Kansas?
3. Of what use
are rivers? Of what use is the ocean?
4. Describe the
mountains of North America.
5. Name and
describe the following: Monrovia, Odessa, Denver, Manitoba, Hecla, Yukon,
St. Helena, Juan Fermandez, Aspinwall and Orinoco.
6. Name and
locate the principal trade centers of the U.S.
7. Name all the
republics of Europe and give capital of each.
8. Why is the
Atlantic Coast colder than the Pacific in the same latitude?
9. Describe the
process by which the water of the ocean returns to the sources of rivers.
10. Describe the
movements of the earth. Give inclination of the earth.
Jensen Comment
The point is not that we should still be
teaching the same material in the 21st Century that was taught in the 19th
Century. Knowledge exploded exponentially since the 1800s, and there are many
newer and more important things to learn today.
But there are certain skills that are still needed, especially skills in reading
and arithmetic. In modern times we should not overlook the need for studying
history and geography. Things like economics and science are more important
today than they were in the 1800s.
But it's a crying shame that high schools are graduating students who can
barely read and do simple arithmetic.
Most Students in Remedial Classes in College Had Solid Grades in High School
Nearly four out of five students who undergo remediation in college graduated
from high school with grade-point averages of 3.0 or higher, according to a
report issued today by Strong American Schools, a group that advocates making
public-school education more rigorous. Peter Schmidt, Chronicle of Higher Education, September 15, 2008
---
http://chronicle.com/news/article/5145/most-students-in-remedial-classes-in-college-had-solid-grades-in-high-school-survey-finds
A major shakeup is coming to the University of
Texas at Austin. President Bill Powers, who is believed to be involved in an
admissions scandal, was given an ultimatum: resign by the next regents'
meeting or be fired.
According to The Houston Chronicle, Powers
has
not yet accepted the offer:
UT System Chancellor Francisco
Cigarroa asked Powers to resign before the
regents meet again July 10, or be fired at the meeting, the source said.
Powers told Cigarroa he will not resign, at least not under the terms
that the chancellor laid out Friday. Powers told Cigarroa he would be
open to discussing a timeline for his exit, the source said.
Powers' ouster follows the opening of an
investigation into UT Law School. Numerous media outlets have reported that
the law school was admitting vast numbers of unqualified students who had
political connections. Powers was formerly dean of the law school.
The scandal may have remained unknown to the public
if not for a personal investigation undertaken by UT Regent Wallace Hall,
who filed numerous public records requests after coming across some
suspicious documents. Powers' allies in the legislature retaliated by
attempting to impeach Hall, though the motion was tabled by a legislative
subcommittee.
The sudden downfall of Powers is a
stunning vindication of the efforts of Hall and
Texas Watchdog.org's Jon Cassidy, who provided an analysis of UT admissions
that corroborated Hall's findings.
Thankfully, it looks like corrupt college
administrators will no longer be able to keep the extent of their wrongdoing
a secret from the public.
A mushrooming scandal at the University of Texas
has exposed rampant favoritism in the admissions process of its
nationally-respected School of Law.
According to Watchdog.org, Democratic and
Republican elected officials stand accused of calling in favors and using
their clout to obtain admission to the law school for less-than-qualified
but well-connected applicants.
The prestigious program boasts a meager 59 percent
of recent graduates who were able to pass the Texas bar exam. Those numbers
rank UT “dead last among Texas’ nine law schools despite it being by far the
most highly regarded school of the nine,”
wrote Erik Telford at FoxNews.com.
“Every law school — even Harvard and Yale — turns
out the occasional disappointing alum who cannot pass the bar,” said
Telford. “In Texas, however, a disturbing number of these failed graduates
are directly connected to the politicians who oversee the university’s
source of funding.”
Telford singled out State Sen. Judith Zaffirini (D)
and State House Speaker Joe Straus (R) as particularly egregious offenders.
A
series of Zaffirini emails showed that the state
Senator was more than willing to pull strings in applicants’ favor. Another
six recent graduates who failed the bar exam twice each have connections to
Straus’ office.
“None of the emails published so far explicitly
mention any sort of quid pro quo, but none need do so,” wrote Watchdog.org’s
Jon Cassidy, “as the recipients all know Zaffirini is the most powerful
voice on higher education funding in the Texas Legislature. Even so, in one
of the emails, Zaffirini mentions
how much funding she’s secured for the university
before switching topics to the applicant.”
Furthermore,
the children of three Texas lawmakers, including
Zaffirini’s son, have graduated from UT Law School and failed the bar exam
eight times between them. In addition to Zaffirini, State Sen. John Carona
(R) and House Appropriations Committee Chairman Jim Pitts (R) each sent
their sons to the program, neither of whom has passed the bar to this day.
Jensen Comment
Bill Powers became famous (some might argue infamous) while Dean at the UT Law
School when he was also Chairman of the Board of Directors of Enron when Enron
imploded. However, in my opinion Enron's top executives were adept at hiding
their illegal and unethical behavior from the Board and the Audit Committee.
Bill Powers commissioned the very long and informative Powers Report about the
underhanded dealings of Enron executives, most of whom eventually served short
prison terms ---
http://www.trinity.edu/rjensen/FraudEnron.htm
One of the best free credit cards out there,
the Capital One Quicksilver earns a solid 1.5% back on all purchases made.
It’s low-maintenance, with no annual fee or foreign transaction fee. In
terms of straight-up rewards rate, it doesn’t fare well against the cash
rewards heavyweights. We’ll break down the Capital One Quicksilver’s
benefits and compare it to the best cash back credit cards on the market.
Read on!
At a glance
Annual fees: None
Foreign transaction fee: None
Rewards program: Cash,
redeemable as a check or statement credit
Signup bonus: One-time $100
bonus after you spend $500 on purchases within the first 3 months.
That’s about average for cash back credit cards
Verdict: Ideal for its simplicity.
You never have to worry about annual fees, changing bonus categories and
rewards gimmicks.
Good for:
Someone who wants a high-earning, no-fees,
no-hassles card
Someone who prefers cash back over travel
miles
Bad for:
Someone who will spend more than $1,000 a
month – at that point, you’re better off with the
Capital One Venture Rewards,
which gives 2% rewards and has a $59 annual fee
Someone who spends a lot of money on gas and
groceries – a tailored card like the
American Express Blue Cash
will give you a higher bonus rewards rate
Sam's Club Discover is now one of the better free credit cards that I use---
http://www.samsclub.com/sams/pagedetails/content.jsp?pageName=creditMarketing
Note that you do not have to shop at a Sam's Club to use this credit card. It is
good almost anywhere that accepts Discover cards in general. I never liked
Capital One and never will use on of this company's credit cards.
People that use credit cards a lot (especially people who travel a great
deal) are probably better off choosing a fee-based credit card. Shop around for
the best deals. No matter how many airline miles I can get for free (even
without traveling) I prefer cash back credit card deals. ---
https://www.creditkarma.com/creditcards/explore?pubKey=5UD8M2MSFWWA2CZS&categoryID=1007&pgsz=0
I stopped using credit cards in restaurants and fuel stations where I don't
know the vendor personally --- and trust the controls of my friend. I mostly buy
fuel from the same pump I've used for years. I do use credit cards on line, but
I try to limit the number of online vendors. I still take a chance with
supermarkets and other big box stores since those credit card cash back benefits
do add up. Most of my online credit card use is with Amazon. And I have a low
credit limit card that I use for online shopping. I still get my credit card
protection on my home insurance plan. There are probably better deals for this
protection.
Truth in Accounting (TIA) calculates
"Per Taxpayer Burden" - remaining debt after
available assets are tapped, for all 50 states. Much of this debt is
retirement contributions not paid each year, as part of employee
compensation.
So tomorrow’s taxpayers must pay retirement costs
for services they never received. Select your state on the map at
http://www.statedatalab.org/
to see more.
State
Per Taxpayer Burden
Average Income
Percent of Average Income
Illinois
$42,200
$45,832
92%
Hawaii
$41,300
$44,767
92%
Connecticut
$46,000
$59,687
77%
Kentucky
$26,700
$35,643
75%
New Jersey
$34,200
$54,987
63%
Some politicians claim state debt can be paid “over
time.” But the debt also grows over time, as more employees retire and
collect pensions and retirement health benefits.
Truth in Accounting recommends legislators tell
citizens the truth about state debt during the budget cycle. Read more
about FACT Based Budgeting (Full Accrual and Counting Techniques)
here.
It’s surprising how many house pets hold
advanced degrees. Last year, a dog received his M.B.A. from the
American University of London, a non-accredited distance-learning
institution. It feels as if I should add “not to be confused with the
American University in London,” but getting people to confuse them
seems like a pretty basic feature of the whole AUOL marketing strategy.
The dog, identified as “Peter Smith” on his
diploma, goes by Pete. He was granted his degree on the basis of “previous
experiential learning,” along with payment of £4500. The funds were provided
by a
BBC news program, which also helped Pete fill out
the paperwork. The American University of London required that Pete submit
evidence of his qualifications as well as a photograph. The applicant
submitted neither, as the BBC website explains, “since the qualifications
did not exist and the applicant was a dog.”
The program found hundreds of people listing AUOL
degrees in their profiles on social networking sites, including “a senior
nuclear industry executive who was in charge of selling a new generation of
reactors in the UK.” (For more examples of suspiciously credentialed dogs
and cats, see
this list.)
Inside Higher Ed reports
on diploma mills and fake degrees from time to time but can’t possibly cover
every revelation that some professor or state official has a bogus degree,
or that a “university” turns out to be run by a convicted felon from his
prison cell. Even a blog dedicated to the topic,
Diploma Mill
News, links to just a fraction of the stories out
there. Keeping up with every case is just too much; nobody has that much
Schaudenfreude in them.
By contrast, scholarly work on the topic of
counterfeit credentials has appeared at a glacial pace. Allen Ezell and John
Bear’s expose Degree Mills: The Billion-Dollar Industry -- first
published by
Prometheus Books in 2005 and updated in 2012 –
points out that academic research on the phenomenon amounts is conspicuously
lacking, despite the scale of the problem. (Ezell headed up the Federal
Bureau of Investigation's “DipScam” investigation of diploma mills that ran
from 1980 through 1991.)
The one notable exception to that blind spot is the
history of medical quackery, which enjoyed its golden age in the United
States during the late 19th and early 20th centuries. Thousands of dubious
practitioners throughout the United States got their degrees from
correspondence course or fly-by-night medical schools. The fight to put both
the quacks and the quack academies out of business reached its peak during
the 1920s and ‘30s, under the tireless leadership of Morris Fishbein, editor
of the Journal of the American Medical Association.
H.L. Mencken was not persuaded that getting rid of
medical charlatans was such a good idea. “As the old-time family doctor dies
out in the country towns,” he wrote in a newspaper column from 1924, “with
no competent successor willing to take over his dismal business, he is
followed by some hearty blacksmith or ice-wagon driver, turned into a
chiropractor in six months, often by correspondence.... It eases and soothes
me to see [the quacks] so prosperous, for they counteract the evil work of
the so-called science of public hygiene, which now seeks to make imbeciles
immortal.” (On the other hand, he did point out quacks worth pursuing to
Fishbein.)
The pioneering scholar of American medical
shadiness was James Harvey Young, an emeritus professor of history at Emory
University when he died in 2006, who
first
published on the subject in the early 1950s.
Princeton University Press is reissuing American Health Quackery:
Collected Essays of James Harvey Young in
paperback this month. But while patent medicines
and dubious treatments are now routinely discussed in books and papers on
medical history, very little research has appeared on the institutions -- or
businesses, if you prefer -- that sold credentials to the snake-oil
merchants of yesteryear.
There are plenty still around, incidentally. In
Degree Mills, Ezell and Bear cite a Congressional committee’s estimate
from 1986 that there were more than 5,000 fake doctors practicing in the
United States. The figure must be several times that by now.
The demand for fraudulent diplomas
comes from a much wider range of aspiring professionals now than in the
patent-medicine era – as the example of Pete, the canine MBA, may suggest.
The most general social-scientific study of the problem seems to be “An
Introduction to the Economics of Fake Degrees,”
published in the Journal of Economic Issues in 2008.
The authors -- Gilles Grolleau, Tarik Lakhal, and
Naoufel Mzoughi – are French economists who do what they can with the
available pool of data, which is neither wide nor deep. “While the problem
of diploma mills and fake degrees is acknowledged to be serious,” they
write, “it is difficult to estimate their full impact because it is an
illegal activity and there is an obvious lack of data and rigorous studies.
Several official investigations point to the magnitude and implications of
this dubious activity. These investigations appear to underestimate the
expanding scale and dimensions of this multimillion-dollar industry.”
Ms. Obokata’s actions "lead us to the conclusion
that she sorely lacks, not only a sense of research ethics, but also
integrity and humility as a scientific researcher,"
a
damning report concluded. The release of the
report sent Ms. Obokata, who admits mistakes but not ill intent, to the
hospital in shock for a week. Riken has dismissed all her appeals, clearing
the way for disciplinary action, which she has pledged to fight.
In June the embattled researcher
agreed to retract both Nature
papers—under duress, said her lawyer. On July 2,
Nature released a statement from her and
the other authors officially retracting the papers.
The seismic waves from Ms. Obokata’s rise and
vertiginous fall continue to reverberate. Japan’s top universities are
rushing to install antiplagiarism software and are combing through old
doctoral theses amid accusations that they are honeycombed with similar
problems.
The affair has sucked in some of Japan’s most
revered professors, including Riken’s president, Ryoji Noyori, a Nobel
laureate, and Shinya Yamanaka, credited with creating induced pluripotent
stem cells. Mr. Yamanaka, a professor at Kyoto University who is also a
Nobel laureate, in April denied claims that he too had manipulated images in
a 2000 research paper on embryonic mouse stem cells, but he was forced to
admit that, like Ms. Obokata, he could not find lab notes to support his
denial.
The scandal has triggered questions about the
quality of science in a country that still punches below its international
weight in cutting-edge research. Critics say Japan’s best universities have
churned out hundreds of poor-quality Ph.D.’s. Young researchers are not
taught how to keep detailed lab notes, properly cite data, or question
assumptions, said Sukeyasu Yamamoto, a former physicist at the University of
Massachusetts at Amherst and now an adviser to Riken. "The problems we see
in this episode are all too common," he said.
Hung Out to Dry?
Ironically, Riken was known as a positive
discriminator in a country where just one in seven university researchers
are women—the lowest share in the developed world. The organization was
striving to push young women into positions of responsibility, say other
professors there. "The flip side is that they overreacted and maybe went a
little too fast," said Kathleen S. Rockland, a neurobiologist who once
worked at Riken’s Brain Science Institute. "That’s a pity because they were
doing a very good job."
Many professors, however, accuse the institute of
hanging Ms. Obokata out to dry since the problems in her papers were
exposed. Riken was under intense pressure to justify its budget with
high-profile results. Japan’s news media have focused on the role of Yoshiki
Sasai, deputy director of the Riken Center and Ms. Obokata’s supervisor, who
initially promoted her, then insisted he had no knowledge of the details of
her research once the problems were exposed.
Critics noted that even the head of the inquiry
into Ms. Obokata’s alleged misconduct was forced to admit in April that he
had posted "problematic" images in a 2007 paper published in Oncogene.
Shunsuke Ishii, a molecular geneticist, quit the investigative committee.
Continued in article
Bob Jensen's threads on the need for independent replication and other
validity studies in research (except in accountancy were accountics researchers
are not encouraged by journals to do validity checks) ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
The European Union's new law giving people a "right to
be forgotten," which
requires Google to remove links to information
about them, is having exactly the effect its critics predicted: It is
censoring the internet, giving new tools that help the rich and powerful
(and ordinary folk) hide negative information about them, and letting
criminals make their histories disappear.
Exhibit A:
Google was required to delete a link to this BBC article about Stan O'Neal,
the former CEO of
Merrill
Lynch.
O'Neal led the bank in the mid-2000s, a period when it became dangerously
over-exposed to the looming mortgage crisis. When the crisis hit, Merrill's
losses were so great the bank had to be sold to Bank of America. O'Neal lost
his job, but he exited with a $161.5 million golden parachute.
Jensen Comment
For the record if you really want to document the criminal and unethical
behavior of Merrill Lynch over many decades and the fraudulent Stan O'Neal do a
word search on "Merrill Lynch" at
http://www.trinity.edu/rjensen/FraudRotten.htm
For example, Merrill Lynch was behind the $1 billion in derivatives trading
frauds in Orange County --- one of the many Merrill Lynch frauds.
A federal judge on Wednesday rejected
PricewaterhouseCoopers' request to dismiss a $1 billion lawsuit accusing the
auditor of providing bad accounting advice that contributed to the October
2011 collapse of MF Global Holdings Ltd, a brokerage run by former New
Jersey Governor Jon Corzine.
U.S. District Judge Victor Marrero rejected PwC's [PWC.UL]
argument that the MF Global's bankruptcy plan administrator, which brought
the lawsuit, "stands in the shoes" of the company under the "in pari delicto"
legal doctrine, and cannot recover because Corzine and other officials were
also to blame for the collapse.
Marrero has yet to review other PwC arguments for
dismissal, including that the administrator had no authority to sue and did
not show that the accounting advice was a "proximate" cause of MF Global's
bankruptcy.
A PwC spokesman had no immediate comment. The
auditor's lawyer did not immediately respond to a request for comment.
The March 28 lawsuit accused PwC of professional
malpractice for providing "flatly erroneous" advice on how to account for
Corzine's $6.3 billion investment in European sovereign debt.
Marrero said that while MF Global may have provided
information used to formulate that advice, the complaint did not suggest it
had an "active, voluntary" role in the advice or was a "willing participant"
in unlawful conduct related to it.
"Under PwC's reasoning, the in pari delicto
doctrine would insulate an auditor from liability whenever a company pursues
a failed investment strategy after receiving wrongful advice from an
accountant," Marrero wrote. "Such a broad reading of the doctrine would
effectively put an end to all professional malpractice actions against
accountants."
Prior to its Oct. 31, 2011 bankruptcy, MF Global
had struggled with worries about the sovereign debt, margin calls, credit
rating downgrades, and news that money from customer accounts was used to
cover liquidity shortfalls.
Corzine is also a former Goldman Sachs co-chairman.
He is not a defendant in the PwC case but faces other lawsuits over MF
Global from investors, customers and U.S. regulators.
The case is MF Global Holdings Ltd as Plan
Administrator v. PricewaterhouseCoopers LLP, U.S. District Court, Southern
District of New York, No. 14-02197.
The theme of this year conference was “The
Institutional Foundation of Capitalism”. Our special session was entitled
‘The New Financial Architecture after Financial Crisis’.
I was a panelist with moderator Guler Aras, Ph.D.
and Professor of Finance & Accounting and Visiting Scholar of Finance at
the McDonough School of Business and Center for Financial Markets and Policy
at Georgetown University, Thomas Clarke, Professor of Management and
Director of the Key University Research Centre for Corporate Governance at
the University of Technology, Sydney, Shyam Sunder, James L. Frank Professor
of Accounting, Economics, and Finance at the Yale School of Management;
Professor in the Department of Economics; and Fellow of the Whitney
Humanities Center, and Paul Williams,
Professor, Ernst & Young Faculty Research Fellow, at NC State University.
Williams is also Associate Editor for Critical Perspectives on Accounting.
The conference was organized by Northwestern University and the University
of Chicago and will be held in Chicago.
Auditors have been weak, complacent and, in some
cases, complicit in the recent failures and frauds, as well as the illegal
acts such as money laundering, foreign bribery and corruption, tax evasion
and Libor-fixing we have seen perpetrated by public companies, especially
banks, after Sarbanes-Oxley, during the financial crisis and since the
crisis.
They no longer follow the mandate of U.S. v
Arthur Young & Co., 465 U.S. 805, 817-818 (1984):
…By certifying the public reports that
collectively depict a corporation’s financial status, the independent
auditor assumes a public responsibility transcending any
employment relationship with the client. The independent public
accountant performing this special function owes ultimate allegiance to
the corporation’s creditors and stockholders, as well as to the
investing public.
This “public watchdog”
function demands that the accountant maintain total independence from
the client at all times, and requires complete fidelity to the public
trust.
To insulate from disclosure a certified public
accountant’s interpretations of the client’s financial statements would
be to ignore the significance of the accountant’s role as a
disinterested analyst charged with public obligations.
Instead of being watchdogs, the global audit firms
are lapdogs to their perceived clients, the company executives. Their
meddling in politics in Hong Kong is a great recent example.
Continued in article
Bob Jensen's threads on causes of the financial crisis ---
http://www.trinity.edu/rjensen/2008Bailout.htm The role the auditors played is overstated. These were the causes of the
financial crisis that commenced in 2007:
Math Error on Wall Street Issuance of CDO portfolio bonds laced with a portion of
healthy mortgages and a portion of poisoned mortgages.
The math error is based on an assumption that risk of poison can be
diversified and diluted using a risk diversification formula.
The risk diversification formula is called the
Gaussian copula function
The formula made a fatal assumption that loan defaults would be random
events and not correlated.
When the real estate bubble burst, home values plunged and loan defaults
became correlated and enormous.
Fraud on Wall Street All the happenings on Wall Street were not merely
innocent math errors Banks and investment banks were selling CDO bonds that they knew were
overvalued.
Credit rating agencies knew they were giving AAA high credit ratings to
bonds that would collapse.
The banking industry used powerful friends in government to pass its default
losses on to taxpayers.
Greatest Swindle in the History of the World --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
On Tuesday (July 15) at 11:00 a.m. I will be
hosting a 35 minute webinar on “The Flipped Classroom.” I am doing this
program in connection with my Financial Accounting textbook (coauthored with
C. J. Skender of UNC). However, I hope to keep the textbook marketing down
to a bare minimum because I really am interested in talking about the
flipped classroom.
I would love for you to join me if you can. You can
register in advance at:
Below is an email that I sent out this evening to
all of my students for the upcoming fall semester. I am trying to plant a
seed in their minds about what I want from them in the fall. I always
believe that a semester goes better if the students know before they ever
meet you what you want from them. They don’t have to waste important
classroom time trying to figure out what you value. As you can see, I just
tell them.
For most of history, the Shiller
Cyclically-Adjusted Price-Earnings ratio (CAPE) oscillated in a pseudo sine
wave around a long-term (130 year) average of 15.30. It spent 55% percent of
the time above the average, and 45% of the time below–a reasonable result
for a metric that allegedly mean reverts. Since 1990, however, the metric
has only spent 2% of the time below its historical average–98% of the time
above.
The metric’s failure to mean-revert over the last
23 years hasn’t been for a lack of reasons. The period covered three
recessions, two stock market crashes, and one bonafide financial panic–the
likes of which hadn’t been seen since the Great Depression. Even in the
worst parts of the 2008-2009 crash–at levels that we now look back on with
nostalgia as the “buying opportunity” of our generation–the metric failed to
provide an accurate valuation signal. In an inexcusable blunder, it
basically called the market “slightly below fair value” (see the black
circle).
If we’re being honest, there are only two
possibilities. Either the “normal” levels of the metric have shifted
significantly upwards over the last few decades, or the metric is broken.
There is no other way to coherently explain why the metric has consistently
failed to migrate towards its long-term average, or spend any amount of time
below it, as it should do every so often in bear markets.
Which possibility is it? In my view, both. The
Shiller CAPE, as constructed by its proponents, utilizes inconsistent data.
In this piece, I’m going to explain the inconsistency in rigorous accounting
detail, and then share the results of a modified version of CAPE that
eliminates it. I’m also going to illustrate the distortion that changes in
dividend payout ratios create for CAPE. Finally, I’m going to taunt the
bears (slightly facetiously) and argue that valuations have probably reached
a “permanently high plateau”, to borrow the famously fatal words of Irving
Fisher in October 1929.
There is no question that the current stock market
is more expensive than the averages of certain past eras–the 1910s, 1930s,
1940s, 1970s, 1980s, etc. Looking forward, long-term equity returns will
obviously be lower than they were in those eras. But the market is not as
expensive as the Shiller CAPE suggests. Moreover, there’s no reason to think
that the valuations of those eras–distorted by world wars (1914-1918,
1939-1945, 1950-1953), gross economic mismanagement (1929-1938), and
painfully high inflation and interest rates (1970-1982)–were somehow more
“appropriate” than current valuations. The valuations in those eras were
“appropriate” to the circumstances of those eras; we live in different
circumstances.
The Use of Reported Earnings: Inconsistently
Measured Data
(Please note that the points below–related to
accounting inconsistencies and dividend payout ratio distortions in the
Shiller CAPE–are not new. Jeremy Siegel, legendary professor at the Wharton
School of Business, has been raising them publicly since at least 2008.)
The Shiller CAPE was developed by Nobel Laureate
Robert Shiller, the well-known originator of the Case-Shiller house price
index. The metric is calculated by dividing an index’s inflation-adjusted
price by the average of its inflation-adjusted annual earnings over the last
10 years.
But how does one define “earnings”? As far as the
metric is concerned, the answer doesn’t matter, as long as the definition is
consistent across time. If the definition is consistent across time, then
apples-to-apples comparisons can be made between the metric’s present value
and its prior values. The comparisons will give an accurate indication of
how cheap or expensive the index is relative to its history, or to what is
“normal” for it.
The latest issue of Deloitte's Heads Up discusses the
framework of the FASB's and IASB's new revenue model and highlights key
accounting issues and potential challenges for entities that account for
real estate disposals under U.S. GAAP. The report includes a discussion of
the revenue recognition framework, key accounting issues, challenges for
entities that account for real estate transactions and other details.
From the CFO Journal's Morning Ledger on July 15, 2014
The wave of companies looking to cut their U.S. tax
bills by relocating abroad through merger deals shows no sign of ebbing,
particularly in the pharmaceutical sector.
AbbVie Inc. and
Mylan Inc. are both nearing deals that will include an off-shore
relocation, the
WSJ’s Liz Hoffman and Hester Plumridge report.
The deals are also cropping up in retail, consumer and
manufacturing, and are being driven by a new appetite for large,
transformative acquisitions, as well as the nagging fear that the chance to
use the cross-border tax strategy may soon vanish. U.S. executives fear
being left out of the party and worry the government, fearful of lost tax
revenue, will shut it down.
And the anxiety among policymakers that tax dollars
will leave for good are well founded. It’s hard to say precisely how much
the U.S. Treasury stands to lose from the inversions, but one estimate puts
the figure at close to $20 billion, the
WSJ’s Joseph Walker reports.
Aside from zero interest on liquid savings of individuals banks are
another casualty of of the Fed's unnecessary continuation of zero interest rates
From the CFO Journal's Morning Ledger on July 11, 2014
Good morning. The lending business is showing growth
and stock markets are near record highs, but don’t look for banks to show
any exuberance when the sector’s earnings season kicks off today, starting
with Wells Fargo & Co.
Analysts are forecasting that the six largest banks will post a 5.6% revenue
decline from last year, the
WSJ’s Saabira Chaudhuf reports.
The blame lies with the ongoing low-rate environment.
Net interest margins, which measure the difference between what a bank makes
on lending and what it pays depositors, have been squeezed.
Some analysts said the slump may be temporary,
pointing to future rate rises and the possibility of legal costs finally
subsiding for Citigroup
Inc. and Bank of
America Corp. But even though lending growth is accelerating,
trading desks have experienced a slowdown that has hampered revenue and
profit growth.
Given their global significance, technology
implementations and related security activities involving emerging
technologies are becoming tightly linked to broader business, governance and
risk activities for the audit committee, other board members and management.
The opportunities presented by access to a wide array of data and
informational sources must be balanced with a recognition of the challenges
and risks they pose, and audit committees can benefit from understanding the
company's overall technology landscape, plans and priorities.
From the CFO Journal's Morning Ledger on July 8, 2014
Wal-Mart shrinks the big box Retail giant
Wal-Mart Stores Inc.
is trying to embrace new business models as its superstores fall
out of favor, the
WSJ’s Shelly Banjo reports..
In May, Wal-Mart reported its fifth straight quarter of negative U.S. sales,
excluding newly opened or closed stores, and its sixth straight quarter of
dwindling traffic. The discounter is also dogged by allegations of bribery
overseas. Company executives say CEO Doug McMillon has doled out urgent
instructions to accelerate new store concepts and online strategies in an
attempt to gain back market share from encroaching rivals like
Amazon.com Inc.
and dollar-store chains.
Jensen Comment
In this era of the e-Shopping rise in popularity, big box store inventory costs
are drag on profits along with having to pay more for big-box labor.
Purportedly the most profitable Wal-Mart per square foot in New England is
the old and relatively small Wal-Mart in Littleton, NH. Since new Wal-Marts are
banned in Vermont a high percentage of shoppers in Littleton have green license
plates. They also come over to avoid Vermont, Massachusetts, and Maine sales
taxes on big ticket items like medication supplies, television sets, computers,
and air conditioners. But the nearby new Super Wal-Mart store in Woodsville, NH
that is on the Vermont border does not seem to do as well per square foot as the
old Littleton Wal-Mart. Go figure!
Canadians also shop a lot in New Hampshire. Among other things the relatively
cheap liquor and wine in NH State stores is a huge draw as Canadians stockpile
for their long and cold winters. Wal-Nart sells beer and wine but not the hard
stuff where the NH State Stores have a monopoly but not monopoly prices ---
somebody taught NH officials years ago about Cost=Profit-Volume (CPV) analysis
where high volume trumps high margins on booze.
The Granite State would be in deep trouble if accounting courses were more
popular in Canada, Vermont, Massachusetts, and Maine.
Question
Can you believe that the Department of Defense would pay too much in in
inappropriate payments for spare parts?
In Washington’s National Gallery of Art hangs a
portrait by Jan Gossaert. Painted around 1530, at the very moment when the
Dutch were becoming the undisputed masters of European trade, it shows the
merchant Jan Snouck Jacobsz at work at his desk. The painter’s remarkable
gift for detail is evident in Jacobsz’s dignified expression, his fine
ermine clothes and expensive rings. Rendered just as carefully are his quill
pen, account ledger, and receipts.
This is, in short, a portrait of not only wealth
and material success, but of accounting. It might seem strange that an
artist would lavish such care on the nuts and bolts of something so mundane,
like a poet writing couplets about a corporate expense report. But the
Jacobsz portrait is far from unique: Accounting paintings were a significant
genre in Dutch art. For 200 years, the Dutch not only dominated world trade
and portrayed themselves that way, but in hundreds of paintings, they also
made sure to include the account books.
This was not simply a wealthy nation crowing about
its financial success. The Dutch were the leading merchants of their time,
and they saw good accounting as the key to both their wealth and the moral
health of their society. To the audience of the time, the paintings carried
a clear message: Mastering finance was an achievement requiring both skill
and humility.
Today when we see accountants in art or
entertainment, they are marginal figures—comically boring bean-counters or
fraudsters cooking the books. Accounting is almost a synonym for drudgery:
from the hapless daydreamer Walter Mitty to the iconic nerd accountant Rick
Moranis plays in “Ghostbusters.” Accounting is seen as less a moral calling
than a fussy brake on the action.
In the wake of decades of financial scandal—much of
it linked to creative accounting, or to no accounting all—the Dutch
tradition of accounting art suggests it might be us, not the Dutch, who have
misjudged accounting’s importance in the world. Accounting in the modern
sense was still a new idea in the 1500s, one with a weight that carried
beyond the business world. A proper accounting invoked the idea of debts
paid, the obligation of nightly personal reckonings, and even calling to
account the wealthy and powerful through audits.
It was an idea powerful enough to occupy the
attention of thinkers in religion, art, and philosophy. A look back at the
tradition of accounting in art shows just how much is at stake in “good
accounting,” and how much society can gain from seeing it, like the Dutch,
not just as a tool but as a cultural principle and a moral position.
***
Scratches on ancient tablets show us that accounts
have been kept for as long as humans have been able to record them, from
ancient Mesopotamians to the Mayans. This kind of accounting was about
measuring stores: Merchants and treasurers recorded how much grain, bread,
gold, or silver they had. Most ledgers were simple lists of assets or
payments.
Accounting in the modern sense started around 1300
in medieval Italy, when multipartner firms had to calculate their
investments in foreign trade. We don’t know who, if anyone, can take credit
for the invention, but it was around this time that double-entry bookkeeping
emerged in Tuscany. Instead of a simple list, it consisted of two separate
columns, recording income in one against expenditures in the other. Every
transaction of expenditure could be checked against corresponding income: If
one sold a goat for three florins, one gained three florins and, in the
other column, lost a goat. It was a kind of self-checking mechanism that
also helped calculate profit or loss. In Hogarth’s “Marriage a la Mode: The
Tête a Tête,” the man with the account books walks off in disgust (left).
HIP/Art Resource, New York
In Hogarth’s “Marriage a la Mode: The Tête a Tête,”
the man with the account books walks off in disgust (left).
It would come to change finance, but was not an
immediate hit. Any system of enforcing fiscal discipline is an incursion
against the absolute control of the account-holder, and kings and the
powerful tended to see themselves above the merchant-like calculations of
bookkeeping. They not only hid their wealth and debts: They often did not
bother to calculate them. In the end, they saw themselves as only
accountable to God; if they needed more ready cash, they could always lean
on their inferiors. At least in the short run, it was far more comfortable
to govern without the constraints of financial accountability.
But in one place, the idea of financial
accountability did take hold. By the early 1500s, Holland had become the
center of global trade, with Antwerp and later Amsterdam acting as the most
important ports in the world. Ships arrived laden with spices, exotic fruit,
minerals, animals, whale oil, cloths, and other luxury goods. In 1602, the
Dutch government in essence created modern capitalism by founding both the
first publicly traded company—the Dutch East India Company, or VOC—and the
Amsterdam Stock Exchange.
Accounting was central to managing not only these
companies, but also the Dutch government itself. While not all tax
collectors or company managers kept perfect double-entry books, it
represented an ideal. It was also seen as a necessary skill for civic
participation. Most members of Dutch society were fluent in accounting,
having studied at home or in publicly funded city accounting schools.
Double-entry accounting made it possible to
calculate profit and capital and for managers, investors, and authorities to
verify books. But at the time, it also had a moral implication. Keeping
one’s books balanced wasn’t simply a matter of law, but an imitation of God,
who kept moral accounts of humanity and tallied them in the Books of Life
and Death. It was a financial technique whose power lay beyond the
accountants, and beyond even the wealthy people who employed them.
Accounting was closely tied to the notion of human
audits and spiritual reckonings. Dutch artists began to paint what could be
called a warning genre of accounting paintings. In Jan Provost’s “Death and
Merchant,” a businessman sits behind his sacks of gold doing his books, but
he cannot balance them, for there is a missing entry. He reaches out for
payment, not from the man who owes him the money, but from the grim reaper,
death himself, the only one who can pay the final debts and balance the
books. The message is clear: Humans cannot truly balance their books in the
end, for they are accountable to the final auditor.
This message rubbed off on political and financial
leaders. They were expected to keep good books, and they could expect to be
publicly audited—a notion fiercely resisted in the great monarchies of the
Continent. In the 17th century, another genre of paintings emerged, showing
public administrators holding their books open for all to see. More than 100
of these paintings were produced between 1600 and 1800. Transparency became
a cultural ideal worthy of art.
The Dutch also appreciated that ledgers, bills of
exchange, and files, like any tool in human hands, were liable to misuse in
the interest of wealth or pride. Dutch painters like Marinus van
Raemerswaele warned against hubris and greed with paintings of bookkeepers
as twisted, grotesque figures in absurd hats who would be as likely to
commit fraud as to keep good books.
The value the Dutch placed on accounting made a
large impression on the English, who sought to emulate “the Mighty Dutch” in
many ways, including this new business technique. By the 1700s, they were
also the only other nation to paint accounting pictures. The English
celebrated the wealth of their Industrial Revolution and Empire with
portraits of successful merchants smiling over their books—and, like the
Dutch, also used account books as a way to wag a finger. In one scene from
William Hogarth’s “Marriage à la Mode,” a popular series of paintings from
the 18th century, a noble couple squanders their lives on parties and
gambling. In a final signal of disapproval, almost like a punctuation mark,
their accountant walks away in disgust.
***
By the late 19th century, accounting had become a
profession of its own, rather than fundamentally a shared practice and
value. It receded from the lives of individuals, and began to take on more
the reputation it holds today.
Two U.S. investment titans are clashing over
whether public pensions should be protected in municipal bankruptcy, a major
test that has implications for workers, investors and distressed cities
across the country.
Payments into pension funds are usually considered
sacrosanct, but fights are breaking out around the U.S. over who gets
priority when a municipality seeks protection from creditors. The latest
battle involves the bankruptcy of Stockton, Calif., and pits mutual-fund
giant Franklin Templeton Investments against California Public Employees'
Retirement System, the largest public pension fund in the U.S.
The firms disagree on whether Stockton's retirement
contributions should be reduced to free up money for a loan repayment. U.S.
Bankruptcy Court Judge Christopher Klein in Sacramento could rule on the
dispute as early as Tuesday.
Many troubled municipalities are grappling with how
to bring down pension costs while municipal-bond holders are trying to
figure out how to protect their interests before or during a municipal
insolvency. Franklin Templeton is separately challenging a new law in Puerto
Rico allowing some troubled public agencies to restructure their debt,
saying it violates the U.S. Constitution.
A ruling that Stockton's pensions can be curtailed
could embolden more cities to use bankruptcy as a way to seek retirement
concessions. In December the judge overseeing Detroit's bankruptcy case
ruled that pensions aren't entitled to "extraordinary protection" despite
state constitutional safeguards against benefit cuts. Calpers has argued in
court that the ruling on Detroit's city-run retirement systems doesn't apply
to California's state-run plan.
The outcome in Stockton "is being watched by
everyone," said Suzanne Kelly, co-founder of Scottsdale, Ariz., pension
strategy and restructuring firm Kelly Garfinkle Strategic Restructuring LLC.
If the judge rules that pensions can be curtailed, Ms. Kelly added, it could
push cities "on the brink" to see bankruptcy as a "feasible option."
Franklin Templeton, which manages assets of more
than $908 billion, is the lone creditor challenging Stockton's plan to end a
two-year run through bankruptcy, arguing the northern California port city
wants to unfairly slice a debt repayment while leaving public pension
contributions intact. The city is offering the San Mateo, Calif., firm about
$350,000, or less than 1%, back on a $35 million loan that paid for fire
stations, a police station, bridges, street improvements and parks.
"The meager recovery that the city is attempting to
cram down," said a Franklin Templeton spokeswoman, "has left us with no
choice but to object so that we can deliver a fair recovery for our
investors."
The state's retirement system, known by the acronym
Calpers, has responded by arguing pension payments are guaranteed by
California law and can't be cut. Stockton contributes roughly $30 million a
year to Calpers, which controls retirement money for municipal workers
across California and has assets of roughly $300 billion.
A Calpers actuary testified in May that Stockton
would be faced with a hefty fee if it chose to terminate its relationship
with the retirement system. The amount would be $1.6 billion, according to
Calpers. "How will that get Franklin more money?" said John Knox, an
attorney representing the city of Stockton. "It boggles the mind."
The bankruptcy judge is expected to rule on the
value of the collateral supporting Franklin Templeton's $35 million loan:
two golf courses and a park. It isn't known if he also will rule on the
larger question of whether pensions can be reduced.
Continued in article
Jensen Comment
Political leaders in Argentina stuck their middle fingers upwards toward hedge
funds that invested billions in Argentina bonds. But the recent U.S. Supreme
Court decision makes it harder for Argentina to borrow badly needed money from
USA investors without repaying former investors in failed Argentine bonds.
Similarly, bankrupt cities like Stockton that ignore obligations to municipal
bond holders in favor of giving priorities to labor unions may find themselves
having to pay soaring interest rates on bonds the city needs to borrow in the
future. The problem of borrowing by California towns and cities is exacerbated
by the gloomy forecast of long-term drought. Screwing former municipal bond
investors may be the height of stupidity in drought-ridden California. Borrowing
costs may soar into the clouds even when California towns and cities can find
investors dumb enough to invest in the Golden State's municipal bonds. This does
not bode well for a troubled state hoping to rebuild its school district, town,
county, and state infrastructure.
Stockton is already becoming a high crime city due in to large measure by
having to lay off so many police officers.
After Nigeria was eliminated from the world cup the Nigerian captain
personally offered to refund all the expenses of fans that travelled to Brazil.
He said he just needs their bank details and pin numbers to complete the
transaction.
Forwarded by Dr. Wolff
Meet Walter Barnes - All golfers should live so long as to become this kind
of old man!
Toward the end of the Sunday service, the Minister asked, "How many of you
have forgiven your enemies?"
80% held up their hands. The Minister then repeated his question. All
responded this time, except one man, Walter Barnes.
"Mr. Barnes, are you not willing to forgive your enemies?"
"I don't have any," he replied gruffly.
"Mr. Barnes, that is very unusual. How old are you?"
"Ninety-eight," he replied. The congregation stood up and clapped their
hands.
"Oh, Mr. Barnes, would you please come down in front and tell us all how a
person can live ninety-eight years and not have an enemy in the world?"
The old golfer tottered down the aisle, stopped in front of the pulpit,
turned around, faced the congregation, and said simply,
“I outlived all them assholes" - and he calmly returned to his seat.
Forwarded by Gene and Joan
I have been in many places, but I've never been in Kahoots. Apparently,
you can't go alone. You have to be in Kahoots with someone.
I've also never been in Cognito. I hear no one recognizes you there.
I have, however, been in Sane. They don't have an airport; you have to be
driven there. I have made several trips there, thanks to my children,
friends, family and work.
I would like to go to Conclusions, but you have to jump, and I'm not too
much on physical activity anymore.
I have also been in Doubt. That is a sad place to go, and I try not to
visit there too often. I've been in Flexible, but only when it was very
important to stand firm.
Sometimes I'm in Capable, and I go there more often as I'm getting older.
One of my favorite places to be is in Suspense! It really gets the adrenalin
flowing and pumps up the old heart! At my age I need all the stimuli I can
get!
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
